com Inc.’s decision to cut its e-commerce business threatens to slow growth in the industrial space sector, one of the hottest areas of commercial real estate.
For now, demand from other retailers should take over, supporting warehouse occupancy rates and rent levels, analysts said.
Rents, occupancy levels and the volume of sales of industrial real estate were already on the rise before Covid-19. They have soared even higher for much of the pandemic, as retailers led by Amazon, Walmart Inc.
and target Corp.
gobbled up record amounts of space in warehouses and distribution centers.
Those growth trends are slowing in some markets, in part because Amazon is now subleasing warehouse space after announcing its slowest growth in about two decades in April. Amazon is one of the largest users of U.S. industrial space, owning or leasing some 374 million square feet at the end of 2021, according to MWPVL International Inc., a Canadian supply chain consultant that tracks demand for Amazon.
The company continued to expand during the pandemic to ensure it could keep up with the surge in demand from home consumers. Its slowdown may disappoint some developers who were hoping to lease ongoing projects from Amazon.
Landlords in some marketplaces could also face new competition from Amazon’s plan to sublet at least 10 million square feet of warehouse space, and possibly as much as triple that amount in the future. over time, as well as a flood of new offerings from developers catering to the strong industrial market. Prior to the Amazon news, real estate analytics firm Green Street had projected around 400 million square feet of new industrial development in 2022.
Amazon’s sublet space “is a new form of sourcing,” Green Street analyst Vince Tibone said. “All of a sudden a lot of it went wild.”
Despite this, analysts say the industrial real estate market remains healthy thanks to low vacancy rates and continued strong demand from other retailers and large users such as Walmart, FedEx Corp.
and DHL. Rents continue to rise in most markets as many businesses add warehousing capacity to store more goods and avoid supply chain bottlenecks.
“Other companies in the supply chain continue to ramp up, which is likely to offset the negative effect from Amazon,” said Evan Serton, senior portfolio specialist at Cohen & Steers. Inc.,
a global investment company.
Equus Capital Partners Ltd., a private equity firm, has already leased more than half of the 11 million industrial spaces it has planned in high-growth states such as Arizona, Florida and Virginia , according to Kyle Turner, Chief Investment Officer.
“You start doing the work on the site, pouring the foundations and the tenant comes in and you rent it out,” he said.
However, the real estate services company CBRE Group Inc.
expects rental volume this year to be 850 million square feet, down from last year’s record 1 billion square feet, in part due to limited supply.
Investor appetite for stocks of industrial space companies has also waned recently. Shares of industrial REITs are down an average of about 22% this year, compared to 13% for the broader REIT index and about the same for the S&P 500, according to Green Street. Prologis Inc.,
the largest industrial REIT, is down even more than average in part due to negative market reaction to its proposed acquisition of rival Duke Realty Corp.
The volume of industrial property sales fell to $6.5 billion in April, down 43% from the same month last year, according to MSCI Real Assets. Market participants say much of this decline is due to rising interest rates, which erode yields by raising the cost of debt.
Market volatility and rising rates are prompting some buyers to seek new terms for signed deals.
“We are seeing negotiations regarding certain assets that have been contracted,” said Ken Hedrick, executive managing director of Newmark Group. Inc.,
a commercial real estate services company.
Amazon’s logistics hub expansion went into hyperdrive when the pandemic hit. At the time, the warehouse market was already stretched due to the growth of online retail in the years leading up to March 2020.
“If I entrust you [Amazon] and the world was closing down, the first thing that went through your head was, ‘Oh, my God, we’re going to have orders exploding. We must do everything to capture as much capacity and space as possible,” said Marc Wulfraat, president of MWPVL.
Amazon’s U.S. industrial space portfolio grew from 275 million square feet at the end of 2020 to 374 million square feet at the end of 2021, according to MWPVL. Prior to the recent news of Amazon’s slowdown, MWPVL predicted that Amazon would hit 460 million square feet this year.
MWPVL has now cut its forecast for 2022 to 430 million, an increase from last year but not as much as previously expected.
“It’s like a freight train coming down the tracks. You can’t stop suddenly,” Mr Wulfraat said.
Write to Peter Grant at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8