Amazon’s Warehouse Pullback Seen As Opportunity For Upstarts To Play Catch-Up

Amazon reportedly plans to get rid of anywhere between 10M SF and 30M SF of warehouse space, a move that represents a dramatic reversal for the company that has for years had the most voracious appetite for industrial real estate.

But its about-face hasn't chilled the hungry market for distribution space — on the contrary, companies that have been competing in a historically tight industrial market see the move as a window of opportunity that hasn't been this open since the pandemic supercharged the need for dedicated logistics space.

“Tenants need space so bad, they're going to take the first available space in an area they need it," said Greg Ryan, who leads Southeast development and acquisitions for industrial player Dermody Properties. "The space will get gobbled up."

Amazon is looking to sublease at least 10M SF of excess warehouse capacity, primarily in the New York, New Jersey, Southern California and Atlanta regions, after it built out too much capacity too fast, Bloomberg reported last month.

Amazon has yet to publicly release any sublease plans. On the website of KBC Advisors, the secretive real estate firm that Amazon has enlisted to build out its distribution network, there are no Amazon subleases listed. Bloomberg reported that, while Amazon could look to sublease as much as 30M SF, it may only offer its spaces for a year or two.

Amazon Chief Financial Officer Brian Olsavsky already signaled earlier this year that the company had gone too far in its pursuit of rampant industrial growth, saddling itself with too much real estate and too many employees.

In another real estate cycle, that much space may have sent reactionary negative shockwaves through the market, but experts who spoke to Bisnow over the last week said the industrial real estate's fundamentals show an industry that can handle such a tremor.

“We got record low vacancy, record low absorption," Ryan said. "I think it will be absorbed rather quickly."

Dermody has a pipeline of 3M SF of new industrial space planned for Atlanta, one of the four markets where Amazon is reportedly looking to dump space. Ryan said the firm hasn't reconsidered its development pipeline, even though Atlanta's top warehouse player has taken itself off the board.

A developer who has built warehouses across the country for Amazon in recent years, speaking to Bisnow on the condition of anonymity, said the e-commerce giant has already shown it wants to slow down its occupancy of new last-mile warehouses. Over the past two years, Amazon has held back from occupying new facilities by six months or more, the developer told Bisnow.

“We are in the process of delivering a few buildings,” the source said. "I know for sure they're going to delay the occupancy for a little bit."

While a 10M SF sublease listing could be a sign of dark clouds ahead, relative to Amazon's footprint, it is a drop in an ocean-sized industrial real estate bucket.

The company leased more than 370M SF of fulfillment, data centers and other real estate in North America and owned another 16.6M SF, according to its 2021 annual report. Outside the U.S., Amazon leases 129M SF and owns nearly 10M SF.

If Amazon does make closer to 30M SF available, it would only be 6% of its leased fulfillment, data center and real estate space globally. And Amazon's move doesn't portend a larger rethinking of fulfillment space needs, Ryan said — quite the opposite.

“I don't believe it's the first domino to fall. Ten million SF on a national basis is a nit. It's nothing,” he said. “We have other things that we watch more importantly than this Amazon space. We're more focused on inflation, interest rates, those sorts of things. Potential recession and stagflation, labor, supply chain delays. Those are all way more important than 10M SF of Amazon space on the market.”

So far this year, the U.S. industrial market has shown little in the way of cooling off. The overall vacancy rate fell to a record-low 3.1% after March, and a lack of supply drove tenant absorption lower from Q1 2021, according to CBRE. Developers delivered more than 86M SF in the first quarter, 62% of which was already inked by tenants.

There is 545M SF of distribution space under construction in the U.S., 32.5% of which is pre-leased, according to CBRE, showing developers have confidence that the market is far deeper than one company.

“It's going to take a lot of supply and more than one year to really kind of slow a good amount of expansion on these vacancy rates,” Bridge Logistics Properties Managing Director Greg Boler said. “The overall fundamentals are still too strong.”

Other industrial developers and landlords echoed those sentiments on recent earnings calls.

“What we are seeing anecdotally across our buildings is very aggressive demand from other tenants, other e-commerce tenants ... [who are] very aggressive,” STAG Industrial Inc. CEO Ben Butcher said during a May 4 earnings call. “So I think a little bit of a tempest in a teapot the announcement, but certainly something that people are paying attention to.”

LXP Industrial Trust Executive Vice President James Dudley said his firm was not overly concerned with Amazon’s pullback on a May 5 earnings call.

“There's quite a bit of supply across the country coming online, but we're seeing equal, if not greater than, demand tracking in pretty much every one of our markets,” Dudley said. "And the tenant pool is diverse."

For e-commerce and other industrial tenants, Amazon’s sublease listings could represent a rare opportunity to quickly grow logistical networks as developers are still grappling with construction material and labor shortages as well as skyrocketing costs thanks to inflation. 

“We 100% look at this as an opportunity for retailers who built themselves up in a smart way,” said Ranjan Roy, vice president of strategy for Adore Me Services, a New Jersey-based women's apparel retailer that manages storage and delivery services for other retailers in the two distribution centers it owns.

Lauren Pittelli, a national logistics consultant for small and midsized companies, said Amazon's sublease listing will especially be welcomed in markets like the Inland Empire, where the vacancy rate is below 1%.

“Our clients are still looking for space. And it's really, really tight,” Pittelli said. "If the pricing is competitive, that space will go."

Roy said Amazon's pullback also helps companies trying to hire — warehouse labor has had one of the hardest-to-find ingredients for logistics companies over the past few years.

“It certainly makes things easier on the staffing side for us knowing that [Amazon is] not going to be hoovering every potential employee within radius of us,” he said.

Amazon's sublease stock is expected to be desirable, especially as many online retailers attempt to shorten delivery times to meet the e-commerce giant's standards.

“We think there are all the other players catching up to what Amazon has kind of built and done over the last couple of years,” Indus Realty Trust Inc. CEO Michael Gamzon said during a May 10 earnings call. "We think even with the slowdown that Amazon ... all the other sectors have been picking up and focused a lot on supply chain efficiencies, which we think is very bullish for the sector.”