Industrial Markets Adjust

Since the start of the pandemic, industrial warehouse space has become one of the hottest commercial property sectors. Amazon, the world’s largest e-commerce company, has been the lead player, tripling the amount of built-out industrial space it owns, according to company filings. In addition to buying existing buildings, the company also has acquired about 4,000 acres of land for future warehouse properties, according to CoStar Group Inc.

Following Amazon’s admission that it overestimated e-commerce growth and overextended its logistics network, the company’s decision to pull back on real estate purchases has analysts wondering if the move will slow growth for the industrial market and commercial real estate, in general, for some regions.

Amazon Pivots

Amazon has cancelled deals for new fulfillment centers and put existing projects on hold from the East Coast to the West Coast and major metro areas in between. Executives are debating whether to unload some of the real estate they don’t immediately need or hang on to it for the day that demand picks up again. Those in favor of keeping properties say it would be even more expensive and potentially impossible to secure the same place in the future. In the meantime, Amazon has decided to sublease at least 10 million square feet of its warehouse space and is exploring potentially ending or renegotiating leases with outside warehouse owners, according to the Wall Street Journal.

Follow the Leader

Over the last three years, Amazon has been the nation’s largest builder of warehouses, spending $10 billion, or about 6% of total construction activity, according to Dodge Data & Analytics. By including projects built specifically for Amazon by developers, the company’s market share was around 13%.

Amazon is “such a large player in this market that if they start pulling back on construction activity, it will pull the market down with them,” Dodge Chief Economist Richard Branch said during a construction outlook webinar.

While this means the warehouse sector could slow down, analysts say a pullback is welcome in some ways. For one, it will undoubtedly free materials up for other new developments, which could lower costs. Also, the land market could ease as well.

Leasing Remains Strong

For the time being, demand from other retailers is expected to pick up any slack left by Amazon’s scaleback. Prologis, a real estate investment trust (REIT) that invests in warehouses, sees a continued bright future for the industrial market. Non-amazon customers in the first quarter of 2022 accounted for 85% of new e-commerce leases, up from 66% in 2020, according to a Prologis report.

At the same time, commercial real estate firm CBRE forecasts 850 million square feet of leasing in 2022, down from the record of 1 billion square feet in 2020. If the projection is accurate, it will still mark the second-highest industrial leasing year on record.