FedEx Turmoil Another Worrying Sign For Construction-Heavy Industrial Market

FedEx delivered a package of poor financial figures to investors this month, the latest warning sign that the e-commerce boom that drove the industrial market during the pandemic is disappearing. 

The company now plans to close over 100 facilities and evaluate more potential cuts as it aims to right the ship. Coming as industry leader Amazon also pulls back from its rapid warehouse expansion, FedEx's struggles could further weaken demand in an industrial market that continues to build at a record pace. 

“The smart ones should be cutting back,” SJ Consulting Group President Satish Jindel, who has worked in the logistics industry for three decades, said of e-commerce tenants. “The pandemic wasn’t gonna last forever. Those who believed it are paying a price.”

FedEx revealed Sept. 15 that due to declining package volumes, its revenue figures for the three months ending Aug. 31 were well below expectations. Its FedEx Ground division that handles e-commerce deliveries made $300M less than company forecasts, and its FedEx Express division was $500M below forceasts. 

To counteract the earnings miss, the company announced a series of cost-cutting measures that could impact its massive real estate portfolio. It initially said it plans to close five corporate offices and over 90 of its FedEx Office locations, customer-facing facilities that take in packages. But a FedEx spokesperson told Bisnow in an email Friday it actually plans to close 140 of the locations. 

It also signaled slowing growth in its logistics portfolio, announcing the cancellation of "certain planned network capacity and other projects."

FedEx CEO Raj Subramaniam, when asked if he believes the economy is going into a worldwide recession, told CNBC's Jim Cramer, "I think so. But you know, these numbers, they don’t portend very well.”

The company's stock price plunged following the news, as investors lost confidence that the CEO could turn the company around, Reuters reported.  

“We really haven’t seen evidence of a broad-based slowdown,” Moody's analyst Jonathan Kanarek told CNBC. "But obviously, FedEx is a bellwether, and we don’t want to dismiss what they’re saying."

Analysts have voiced mixed views on what FedEx's results signal about the broader global economy, but the impacts on the U.S. industrial market appear clearer, experts told Bisnow, as FedEx is the latest in a string of logistics players to slow its real estate growth. The slowdown comes as the pandemic-induced boom in online deliveries has faded. 

E-commerce sales exploded in the second quarter of 2020, up 53.4% year-over-year, then the next three quarters all experienced 40%-plus growth, according to Digitial Commerce 360 report. The pace of growth fell in Q2 2021 to 15.4%, and it has since been in the single digits.

In April, consumers spent $5.28B less online than in the previous month, a drop of 6.8%, according to Forbes. That was still up 4.5% from April 2021, but the growth rate before the pandemic typically hovered above 10%. For delivery companies that bet on continued double-digit growth to fuel their massive industrial expansions, this slowdown may be a bad sign. 

“If they don't manage the cost, they will feel that pressure,” Jindel said. “Volumes are not going to grow at the pace they did in 2021. A lot of companies have been announcing [cuts], and they should have done it before they faced challenges and losses.”

While FedEx is shuttering corporate offices and dozens of small consumer-facing facilities, it hasn't announced any closures of major warehouses in the U.S. But experts say those closures could be coming, as the company said in the Sept. 15 announcement that "additional real estate rationalization planning [is] under way.” 

The slowdown from FedEx is the latest hit to demand in a year that has been marked by Amazon closing dozens of warehouses, causing growing fears in the market that the industrial real estate sector may be overbuilding. 

The amount of industrial space under construction in the second quarter totaled an unprecedented 699M SF, up more than 100% from pre-pandemic levels, according to Cushman & Wakefield, which found that just under 26% of that space was pre-leased. 

“Our new supply forecast indicates that we think supply will outpace demand going forward,” Vince Tibone, a retail and industrial senior analyst at Green Street, said during a July 14 webinar. 

FedEx's footprint may not be as big as Amazon's, but the company still represents a significant amount of demand, leasing millions of square feet of warehouses across the country's largest industrial markets.  

The company's biggest properties — its FedEx Express sorting and handling facilities — include a 3.6M SF facility in Memphis, Tennessee; a 2.5M SF facility in Indianapolis; a 948K SF facility in Fort Worth, Texas; a 595K SF facility in Newark, New Jersey; a 593K SF facility in Greensboro, North Carolina; and a 587K SF facility in Oakland, California, according to FedEx’s 2021 Annual Report. The company also operates major sorting and handling facilities in Miami, Chicago, Los Angeles and Anchorage, Alaska, plus international locations in France, Germany, China and Japan. 

FedEx Ground owns and leases 625 facilities, including 40 hub locations that range in size from 100K SF to 1M SF, according to the report. The company's freight segment has nearly 400 service centers that range in size from 1,000 SF to 280K SF of office and dock space. 

Determining whether it can reduce its footprint going forward won't be an easy task, said Lauren Pittelli, principal at Baker Logistics Consulting Services.

“It is really hard for a provider, when you are experiencing 25%, 26% growth in a market, to accurately forecast that the demand is going to go down or the growth rate will go down to 12.2%,” Pittelli said. “FedEx’s results are a reflection of the reduced growth rate.”

Changing consumer behaviors since the pandemic began have taken their toll on other companies that grew quickly during 2020. Analysts pointed to Peloton as a warning sign for companies that may need to re-evaluate their costs. 

At the height of the pandemic, Peloton’s stock price reached over $160 per share according to Business Insider, but it has since plummeted to roughly $8 per share. The company laid off hundreds of employees and announced in August it was shuttering multiple storefronts and closing all of its North American warehouses.

“You don’t want to be the next Peloton,” Pittelli said. 

The Peloton case reflects a shift in consumer behavior from home-oriented products to more experience-oriented spending like travel, experts said. 

“It's because consumers now are able to pay for services,” Pittelli said. “You know, during Covid, they couldn't really buy any services. That increased demand for hard goods, which drove a lot of logistics activity and particularly ramped up the growth rate of e-commerce, but now consumers have reverted to prior spending habits.”

E-commerce leader Amazon has made waves this year with its industrial pullback, but it hasn't yet led to widespread damage to the market.  

In May, Bloomberg reported Amazon planned to shed 10M SF to 30M SF of warehouse space. The company has since revealed closures of existing facilities and cancellations of planned openings totaling 66 properties, including at least 17 over the last month. The closures announced during the last month included two facilities in Baltimore and a last-mile delivery center in the Bronx. 

“We've seen two Amazon subleases hit the market and two Amazon suppliers put some sublease space in the market,” said Matt Laraway, partner at Maryland-based industrial developer Chesapeake Real Estate Group. “The market was so tight that it's nothing that has negatively impacted the health of the market in any way.”

The industrial market has remained stable in the face of the worrying signs, with the vacancy rate sitting at 3.1% as of Q2, according to Cushman & Wakefield. A slowdown from the big players and potential uptick in vacancy could help smaller tenants find space and get in on the action, but that may not be good news for landlords. 

“Anything that puts any inventory in the U.S. market is a positive,” Pittelli said. “Unless you’re in the real estate industry.”