What Amazon’s Downsize Means for the Industrial Sector
With Amazon looking to sublease as much as 30 million square feet in a downsizing maneuver, how will this impact the industrial sector?
About a year ago, I penned an article about the top 10 industrial projects under construction nationwide — and all but one involved Amazon. (Curious about the remaining one? It was Tesla’s Austin plant.)
Logistics Management reported in late May that Amazon has acquired 272 million square feet of distribution and warehouse space during the pandemic, bringing the e-commerce giant’s total footprint to 525 million square feet nationwide. And now it appears it may have grown too much, too fast.
Following its announced $3.8 billion net loss for the first quarter, Amazon decided to put a stop to leasing any more space. What’s more, the firm is now planning to offload between 10 and 30 million square feet through subleases, Business Insider reported.
How Will This Affect Industrial Real Estate?
Throughout the pandemic, the industrial sector has been characterized by one key statistic: vacancy. Or, rather, the lack of it. Looking at the most active industrial real estate markets in the U.S., the vacancy has fallen to shockingly low levels. The Inland Empire hit a record vacancy of 0.8% in April, for example, and New Jersey closed the month at 2.8%, according to Yardi Matrix’s May industrial report.
For tenants in those markets — or in any, really, as the vacancy is low in nearly all metros — this may give cause to breathe a sigh of relief. Vacancy compression, after all, is often pointed at in industrial rents’ rapid increases over the past couple of years.
The reality, however, is that Amazon’s industrial downsize isn’t in itself the symptom of a wider, marketwide phenomenon of people and companies giving up space. In fact, while 30 million square feet of distribution space may seem like a lot, it’s barely 5% of the e-retailer’s footprint — and its downsizing won’t be in a single market, but spread across many.
In short, any space put back on the market will assuredly be snapped up incredibly fast. After all, Amazon has a notorious obsession for quality when it comes to industrial space, often opting for large and tall distribution centers built to exacting standards. Those types of assets are the first to get leased up — and the amount of space coming to market will still be dwarfed by tenant demand for more, more, more.
Industrial Rents Will Still Climb
The Commercial Real Estate Development Association projects industrial absorption to hit about 400 million square feet this year or 100 million square feet per quarter. If anything, an increase in available square footage will lead to tenants waiting in the wings to jump on any opportunity to secure warehouse space, increasing absorption rather than letting vacancy expand (except by, perhaps, a few basis points over a period of only a couple months).
With vacancy remaining tight amid more high-end space coming available, prices will continue doing what they’ve been doing for the past two years: soar.
Related Questions
What impact has Amazon's downsizing had on the industrial real estate sector?
Amazon's downsizing has had a mixed impact on the industrial real estate sector. In some markets, such as Los Angeles and Northern New Jersey, the industrial sector has seen vacancy plummet and rents rise due to a dearth of available land for new development and surging port traffic. However, in other markets, particularly those outside the urban center, owners of Class B and C properties could face challenges. Savvy value-add investors can reap significant gains by investing in capital improvements to modernize space and add amenities. Source and Source
What strategies can industrial real estate owners use to mitigate the effects of Amazon's downsizing?
Industrial real estate owners can mitigate the effects of Amazon's downsizing by keeping a diverse tenant mix and researching their local market. Keeping a diverse tenant mix means having several tenants of varying sizes and in various industries. This way, vacancy costs are far less likely to skyrocket when one company downsizes. Additionally, researching the local market can help industrial real estate owners understand the trends in the industrial sector and ensure their property stands out from the crowd. By taking stock of ongoing trends in the industrial sector, owners will be better prepared to keep their property full when times are tough.
What are the long-term implications of Amazon's downsizing on the industrial real estate sector?
The long-term implications of Amazon's downsizing on the industrial real estate sector are not yet clear. While Amazon has been leasing more than 100 million square feet per year for the past two years, according to Brian Bailey from the Atlanta Fed, it is too soon to tell if this trend will continue.
However, according to CBRE's Doyle, the need for industrial space is likely to remain strong due to the continued growth of e-commerce and the need for last-mile distribution centers. Yardi Matrix's January industrial report pegged December's national vacancy rate at 5.7%, and projects under construction totaled 572.8 million square feet, equal to 6.9% of the country's inventory.
It is possible that companies may begin to shift back to the office, as some major law firms have inked huge new office leases, according to an article in The American Lawyer. However, this is more anecdotal than any indication of long-term trends.
Overall, the long-term implications of Amazon's downsizing on the industrial real estate sector are not yet clear, but the sector is likely to remain strong due to the continued growth of e-commerce and the need for last-mile distribution centers.
What are the best financing options for industrial real estate owners affected by Amazon's downsizing?
The best financing options for industrial real estate owners affected by Amazon's downsizing depend on the size of the loan and the individual's situation. Many types of financing may be available, such as bridge loans, permanent loans, and mezzanine loans. For more information about what loan may be right for your situation, head to our portal and our advisors will connect you with a wide variety of lenders to get a quote at no charge. Additionally, IndustrialProperty.Loan provides detailed information about loan products and their terms.
How can industrial real estate owners adjust their business models to accommodate Amazon's downsizing?
Industrial real estate owners can adjust their business models to accommodate Amazon's downsizing by diversifying their tenant mix. Keeping a diverse tenant mix is a key in mitigating risk, as not every company needs to downsize during a recession. Having several tenants of varying sizes and in various industries can help reduce vacancy costs if one company downsizes. Additionally, industrial real estate owners can look to other companies that are expanding during a recession, such as Netflix, for inspiration.
Industrial real estate owners should also consider the long-term effects of the pandemic on office assets. Many companies are looking for ways to reduce their leasing costs, such as shifting half their workforce to working from home. It is likely that workers will continue to work from home, or at least in an office less, and this could have significant ramifications for the office real estate market.
Lenders are already viewing these shifts, with the share of office loans being placed on watch lists or sent to special servicers hitting highs not seen since the global financial crisis. Industrial real estate owners should be aware of these trends and adjust their business models accordingly.
What are the most important considerations for industrial real estate owners when seeking financing after Amazon's downsizing?
When seeking financing after Amazon's downsizing, industrial real estate owners should consider the following:
- The current market conditions and the outlook for the industrial sector.
- The availability of financing options and the terms of those options.
- The size of the loan and the amount of equity required.
- The creditworthiness of the borrower.
- The type of property and its location.
For more information on industrial property loans and financing options, IndustrialProperty.Loan is a great resource. Additionally, CommercialRealEstate.Loans offers a portal to connect borrowers with a wide variety of lenders to get a quote at no charge.