Guy Barnard, Co-Head of Global Property Equities, provides context to news of Amazon’s warehouse slowdown and the implications on the industrial real estate sector.
- As a leader in e-commerce and one of the largest warehouse tenants in the U.S., Amazon’s impact on warehouse capacity is significant for real estate investment trust (REIT) investors.
- Recent news of Amazon’s anticipated sublease program has created concerns for industrial real estate. However, this would only account for a fraction of total U.S. industrial inventory, meaning the overall impact on vacancy rates for the sector is likely to be minimal.
- It will take time for investors to digest the implications of Amazon’s revised warehouse capacity ambitions, but we believe that industrial fundamentals are starting from a position of great strength.
In a previous post, we talked about how the shift from just-in-time to just-in-case supply chains is a multi-year structural trend creating stronger demand for warehouses, accelerated by the structural rise of e-commerce. In line with this, the large demand-supply imbalance has been supporting accelerating warehouse rents.
However, investors in industrial real estate have been spooked in recent weeks. In April, Amazon announced during its first quarter earnings call that it had excess warehouse capacity and was temporarily halting growth plans as it seeks to “improve productivity and cost efficiencies.” Now, media outlets have reported that Amazon is planning to “cancel” warehouse leases, aiming to sublease at least 10 million square feet of space amid cooling sales growth. Headlines can of course shift investor perception, and although an Amazon scaleback is certainty not good news, some context helps provide better perspective.
Amazon has unquestionably been a leader in e-commerce and has become the largest tenant in the country, making the company a key driver of U.S. warehouse demand. However, its direct influence on the market peaked in 2020 following a historic boom in online shopping due to COVID-related lockdown measures. Prior to the pandemic, there was always a linear relationship between Amazon’s online retail sales growth and its industrial leasing activity, typically averaging 15% to 20% growth annually.1 The pandemic then fueled an extraordinary rise in e-commerce as consumer shopping habits pivoted. Amazon duly responded with a rampant expansion of its warehouse footprint.
In an attempt to control its own delivery network and amass an empire to rival the most dominant logistics companies, Amazon leased an eye-popping 127 million square feet in 2020. This was followed by a further 106 million square feet in 2021. The company effectively doubled its entire 25-year footprint in the space of two years.2 If Amazon’s first two decades in business sparked a revival of the modern warehouse sector, that 24-month period gave a glimpse into a golden age. While this growth was stratospheric, it was perhaps also rational given the company’s ambition to build an unrivaled logistics system capable of delivering same-day packages to consumers across the U.S. It is clear that such a rate of change in warehouse leasing in such a short space of time was never going to be repeated.
Amazon’s % of U.S. National Industrial Leasing
Source: Janus Henderson Investors, BofA Global Research. “Industrial REITS: AMZN news is not new information; Industrial is a buying opportunity,” 2 May 2022.
In 2020, Amazon comprised 14% of overall U.S. industrial leasing, falling sharply to 5.2% in 2021. Year to date, the company’s share of leasing has fallen to just 3.3%, back to levels seen in 2018. Industrial real estate investment trust (REIT) CEOs and leasing brokers have long considered waning leasing demand from Amazon to be old news, claiming that it had been anticipated and penciled into future forecasts. Indeed, REITs gave some indication of their expectations for earnings in 2022 after Amazon’s announcement, providing visibility for their outlooks that was inclusive of a slowdown. It will be important to watch the increasingly uncertain macroeconomic environment closely and monitor whether other users are also looking to sublease space or cease expansion. Could Amazon be the canary in the coal mine for a broader slowdown in industrial demand? It’s possible, though so far there are no signs of it.
As for Amazon’s immediate intentions, sensationalist headlines that Amazon is canceling leases requires some clarification. Leases are contractual and therefore “canceling” is not straightforward. If Amazon was to decide that it does not need the amount of space being leased, it could opt to sublease the warehouse to another user while still maintaining the obligation to pay rent as agreed to the landlord (unless they file for bankruptcy). This is common practice in the real estate industry.
The absolute scale of Amazon's supposed 10-million-square-foot sublease program must also be put into perspective. Total U.S. industrial inventory is 16 billion square feet; 10 million square feet of additional supply would add a mere 0.1% to the national vacancy rate. In the most bearish scenario – one where Amazon is removed entirely from future take-up of space in 2023-24 – the annual vacancy rate would rise by <0.5%. 10 million square feet represents just ~2.5% of Amazon’s total U.S. industrial footprint.2
Diversity of Industrial Leasing Demand, YTD 2022
Source: Janus Henderson Investors, JLL Research. Quarterly leasing figures are preliminary and subject to change. The distribution of leased square feet by industry does not include leases for which a tenant or industry is unknown or undisclosed. Republished with permission.
It is also worth noting that Amazon is not starting this activity in conjunction with any earnings update or recent media outlet speculation. In fact, the company’s actions are already underway, against a backdrop where industrial market fundamentals are the strongest they have ever been. The first quarter of 2022 saw total leasing of approximately 140 million square feet of space in the U.S., the second-best quarter in history. Demand is broad-based, covering multiple sectors of the economy, with e-commerce only directly representing 8%.1 In addition, a shifting global landscape and supply chain issues are creating new drivers of demand. As one REIT CEO recently commented:
“Previously we have talked about globalization and ‘just in time.’ Today, it's increasingly about localization and ‘just in case.’ ”
As a result, national vacancy rates have fallen for 18 straight months, reaching a record low of 3.4% in the first quarter of 2022. Rents are up 16% year over year nationally, and significantly more in high-barrier-to-entry coastal markets. Industrial REIT occupancy is now essentially maxed out at nearly 100%.1
So while it will take time for investors to properly digest the implications of Amazon’s more subdued activity, we believe that for the sector more broadly, industrial real estate fundamentals are already in what appears to be a position of great strength.
1 JLL US Industrial Market Overview, Q1 2022.
2 Marc Wulfraat, Founder, MWPVL International, Inc., a supply chain/logistics consulting firm.
REITs or Real Estate Investment Trusts invest in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares.
Real estate securities, including Real Estate Investment Trusts (REITs), may be subject to additional risks, including interest rate, management, tax, economic, environmental and concentration risks.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.