Amazon says it has too much warehouse space. What's that mean for the broader industrial market?
Published: May 4, 2022

Amazon.com Inc., the undisputed king of the U.S. industrial market since well before the Covid-19 pandemic, may finally have reached max capacity on warehouse and fulfillment space.

Executives at the Seattle-based e-commerce giant in its first-quarter earnings call last week said the company currently has excess capacity in its fulfillment and transportation network. In Q1, Amazon posted its first financial loss, of $3.8 billion, since 2015.

"Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business," said Brian Olsavsky, chief financial officer at Amazon, during the earnings call. "During the pandemic, we were facing not only unprecedented demand but also extended lead times on new capacity. And we built toward the high end of a very volatile demand outlook."

Amazon's real estate footprint

Amazon took what was already a robust leasing-and-ownership pipeline to new levels since the pandemic, as online ordering accelerated as people stayed home.

The e-commerce company doubled its real estate footprint that includes data and fulfillment centers (but not office space or physical stores) between the end of 2019 and the end of 2021, according to figures in Amazon's 10-K disclosures. Its footprint for that type of space measured 192.7 million square feet at the end of 2019, compared to nearly 387.1 million square feet at the end of 2021, with a bulk of that space leased rather than owned.

Amazon represented about 15% of net absorption and new demand in U.S. industrial last year, said Vince Tibone, senior analyst at Newport Beach, California-based commercial real estate analytics firm Green Street Advisors Inc. That's a material share of a real estate sector that's seen unprecedented growth from every corner of the market.

A spokesperson for Amazon declined to comment when asked by The Business Journals about the company's industrial deals currently in the pipeline and how much warehouse square footage it planned to add in the future. The spokesperson referenced a shareholder's letter sent by CEO Andy Jassy, which said the company had 253 fulfillment centers, 110 sortation centers and 467 delivery stations in North America at the end of 2021.

Will Amazon's need for less warehouse space, at least right now, result in any ripple effects for the white-hot industrial market?

"I think it's definitely a little bit concerning in the near term," Tibone said, of Amazon. "The fact that they are probably going to slow down their leasing for 12 to 18 months is maybe just a soft spot in demand that has otherwise been really strong."

Financial outlook for REITs

Green Street was set to significantly increase its rent and net operating income forecast for the industrial REITs the firm tracks, but the Amazon news has cast some doubt on that, Tibone said.

Still, industrial REITs had a strong first quarter overall, and have been on a tear since the pandemic. San Francisco-based Prologis Inc. (NYSE: PLD), the largest industrial REIT by market capitalization, posted record growth of 8.7% in same-store NOI in Q1. Its average occupancy across its portfolio was 97.4% in the quarter, and 98.1% leased as of March 31.

Indianapolis-based Duke Realty Corp. (NYSE: DRE), meanwhile, reported its stabilized portfolio at 99.4% leased in Q1. Leases executed during the quarter had, on average, 3.6% annual rent escalations.

But since Jan. 1, stock prices for 14 public industrial REITs have tumbled an average of 16.6%, according to an analysis by The Business Journals. Notably, several industrial-focused REITs saw declines in their stock price in the wake of Amazon's earnings call on April 28. Economic issues related to the supply chain and inflation have been cited by industrial REIT executives as headwinds for the market.

State of industrial market

Analysts and market observers say Amazon is an outlier in many ways, despite being such a significant force in the broader warehouse market.

Adrian Ponsen, national director of the U.S. industrial market at CoStar Group Inc. (NASDAQ: CSGP), said he doesn't see the Amazon news as a harbinger of a looming crisis in the industrial market. Both he and Tibone pointed to the fact that Amazon plans its fulfillment capacity two years ahead of time.

Olsavsky said in the earnings call about 30% of the company's $61 billion in capital investments for the trailing 12-month period ended March 31 went to fulfillment capacity, primarily warehouses. He said overcapacity, coupled with "extraordinary leverage" in Q1 of last year, resulted in $2 billion of additional costs year over year in Q1.

Even if Amazon completely halted its pipeline — unlikely, especially given how far in advance the company works to secure leases or development sites — there's enough demand in the industrial market to fill the hole it would leave.

"The market is so tight right now that we could see absorption slow below 10% and we’d still see demand outpacing supply, and owners are still able to push rents," Ponsen said. Most warehouse tenants right now remain starved for space and aren't overextended, he added.

Newmark Group Inc. (NASDAQ: NMRK) in its Q1 report made reference to Amazon's reassessment of warehouse space. It said the company reportedly had more than 200 industrial projects in the pipeline, and that stakeholders across the country have said Amazon recently withdrew plans for some new industrial projects. No specifics were provided.

Lisa DeNight, national industrial research director at Newmark and the report author, said in a recent interview with The Business Journals she couldn't comment on Amazon beyond what was in the report.

But, she said, reassessment is a broad theme crossing a lot of stakeholders in the industrial sector right now.

"Amazingly, the American consumer remains tremendously resilient," she said. "But there are headwinds at play that are causing a lot of people to take a look at their footprint and optimization."

Those headwinds include surging costs to build new warehouse space, the tightness of certain in-demand industrial markets and the ability to even source materials for construction.

Still, she continued, that reassessment among, especially, larger tenants is opening up the market for occupiers that’ve been squeezed out of opportunity for years.

Is pandemic surge in e-commerce waning?

Amazon's anticipated deceleration of industrial space needs, not to mention overall Q1 performance, may throw into question whether the run-up in e-commerce sales through the pandemic is finally waning, and what that spells for warehouse demand.

Even amid inflation, and as consumers get back to things like dining out and traveling, spending for goods has held up. Retail sales climbed 0.5% in March from the previous month.

In March, the U.S. saw consumer spending increase 1.1%, or $185 billion, while personal income increased $107.2 billion, or 0.5% monthly, according to the U.S. Commerce Department’s Bureau of Economic Analysis. March saw an increase of $114.6 billion in spending for services and an increase of $70.4 billion in spending for goods. Meanwhile, the Consumer Price Index rose 8.5% on an annual basis in March.

The National Retail Federation in March forecasted 2022 retail sales will total between $4.86 trillion and $4.95 trillion, with non-store and online sales specifically expected to grow between 11% and 13%.

Amazon itself, though, reported a 3% year-over-year drop in its online stores segment in Q1. Beyond Amazon, overall U.S. online sales fell 6.4% in March from the month prior, according to the Commerce Department.

Tibone said there's a debate about whether the economy is returning to a level of normalization after the pandemic spike in online shopping — a temporary phenomenon — or whether online sales will continue to grow, meaning pandemic levels of online sales represent a new baseline rather than a blip.

Ponsen referenced Amazon's net sales in Q1, a segment the company posted 7% growth in Q1 from Q1 2021. When adjusted for inflation, that’s essentially flat, he said.

"That is an important indicator to the rest of the industrial market as well that growth in e-commerce sales is probably going to be taking a breather after the amazing run it’s had over the past few years," he continued.

Medium-term outlook

Any ripple effect that could have on the warehouse sector likely won't show up for a few quarters, and would first be observed in leasing activity, Ponsen said. It's unlikely rent growth would be affected until, potentially, several quarters because the market remains so tight.

Industrial landlords will continue to have pricing power for the foreseeable future, Tibone said.

One potential opportunity for industrial development if Amazon pulls back on its warehouse real estate: availability of construction materials. Ponsen said Amazon has used up a large portion of building supplies available for its robust real estate expansion, including coveted materials like steel.

"They're the biggest consumer of steel for new construction in the country right now, by far," he continued. "That’ll have a positive impact for all the other people out there looking to get those materials."

What may happen beyond the next couple of quarters — two to three years out, in particular — is murky, and may be where the warehouse market sees a more significant deceleration, especially if consumer spending patterns shift away from goods and online shopping.

Even Amazon's Olsavsky said the company will be glad to have its warehouse capacity in the third and fourth quarters because of the surges in orders and inventory it sees during its Prime Day and holiday season.

"... the way we see it is, we've come out of a very tumultuous two years," he said. "We are glad we made the decisions we made over the past two years. And now we have a chance to more rightsize our capacity to a more normalized demand pattern."