Duke Realty Not Sweating Amazon's Pullback As Everyone Else Plays Catch-Up

Amazon is easing off the gas, but the industrial real estate market should be just fine without its largest demand driver, according to Duke Realty.

Despite Amazon playing a large role in its financial successes over the past few years, Duke has lessened its exposure to Amazon and said in its Q1 2022 earnings call that it foresees other companies picking up the slack, keeping tenant demand and both lease and sales pricing on the rise — renewing tenants saw their annualized net rents go up nearly 50% this quarter. 

“I think people have talked or speculated about Amazon pulling back, and we saw them pull back in terms of their deals signed last year. And yet we had record demand across the country,” Jim Connor, chairman and CEO of Duke Realty, said on the call.

Amazon is still Duke’s largest customer, representing 5.7% of its annualized average net lease value. However, this is a drop-off compared to last year’s numbers, which clocked in at 9.1% of its ANLV. Overall, e-commerce has moved from Duke’s most active segment for leasing activity to its second-largest. Third-party logistics has taken over the top slot. 

Amazon’s expansion spree has left a massive strain on the construction industry, aggravating an already unprecedented supply chain crisis across the United States and shutting out other companies from growth.

The company has now sufficiently (or maybe even overly) built out its own infrastructure to support consumer demand, which will slow its future leasing and development deals, but Connor said “the vast majority” of Duke’s other clients are still playing catch-up, which is spurring Duke to do more spec development and is allowing the company to keep pushing rents. All of the spec projects Duke has delivered in the last 12 months are 100% occupied, and Connor said the company sees enough demand to keep up the pace.

Duke raised annualized net effective rents 29.5% last quarter for new leases and 49.2% for renewals.

It is also putting in larger rent escalation clauses. Chief Operating Officer Steve Schnur called these clauses “a big point of emphasis” and said Duke has gone from writing in 3% annual bumps in the latter part of 2021 to putting in 3.6% hikes in Q1 2022. Schnur said he expects that rate to continue to rise, especially in the face of inflation.

Meanwhile, higher-than-expected pricing on the investment side has Duke coming to the sales table more often. 

“We are seeing an increase in reverse inquiries for some of our assets at prices we previously did not expect, did not have in our original plan to sell in 2022,” Chief Investment Officer Nick Anthony said. “As a result, we have increased our guidance for dispositions to a range of $900M to $1.1B.”

Gains on sale of properties shot up from $21M in Q1 2021 to $210M in Q1 2022 — a nearly 900% increase.

The continued future-proofing of supply chains could drive manufacturing demand a few years down the road as companies work through the lengthy process of re-engineering their operations. Even before that, retailers will try to increase their inventory on hand to make up for shutdowns in Chinese production.

“The near-term impact is the safety stock that our customers are out trying to put in their logistics and supply chain,” Connor said on the earnings call. “I think the impact of onshoring and nearshoring will be a little slower but steady or steadier over the course of the next likely five to seven years.”