Supply Chain Matters highlights that companies that sublease excess warehouse or office space is a normal occurrence in business settings, but when Amazon moves in that direction, it can send a shock wave to the industrial real estate ecosystem.

In late April, online retail platform provider Amazon was one of the first retailers to issue unanticipated and disappointing news to Wall Street. The company reported its first quarterly loss in over seven years while delivering sober messages related to increased costs associated with online retail. While total revenues increased 7 percent in the January-to-March quarter, the provider incurred a $3.8 billion loss compared to a $8.1 billion profit in the year-earlier quarter. Once more, executives forecasted that the online retailer could incur either another loss of upwards of $1 billion or profit amounting to $3 billion in the current Q2 quarter. Executives hinted that the company’s warehouse and logistics network, which was significantly expanded to support increased online order volumes during the years 2020 and 2021, may now be more than is needed and steps would be taken to alleviate costs of such capacity. Amazon CFO Brian Olsavsky had indicated in Q1 alone, overcapacity had contributed $2 billion in added costs.

Published reports from Bloomberg, Business Insider and The Wall Street Journal report that the online retailer has now acknowledged that it overbuilt capacity and now aims to sublet upwards of 10 million square feet or more of warehouse space.

The Bloomberg report, citing people familiar with the situation, that excess capacity includes warehouse properties in New York, New Jersey, Southern California and Atlanta. One source indicated to Bloomberg that a final estimate on excess square feet has not been reached and that the total figure remains in flux.  The report indicates that at the end of last year, the online retailer had leased upwards of 370 million square feet of industrial real estate across the U.S., double that of two years earlier.

Logistics focuses REIT firm Prologis is noted as having Amazon as one of its biggest tenants. The Motely Fool recently reported that Prologis shares gained nearly 70 percent last year, outpacing the REIT sector’s roughly 40 percent average. However, shares have tumbled 26 percent from their peak this year. Reportedly most of that decline occurred the past couple of weeks. Prior comments from Amazon executives during Q1 financial reporting reportedly sent shockwaves through the entire industrial real estate sector because the highly visible online platform provider is a major demand driver for warehouse space in the leasing market.

Prologis itself recently announced an offer to acquire industrial REIT Duke Realty in a reported $24 billion proposal. Duke subsequently rejected that offer indicating it wasn’t sufficient, though it remains open to exploring a deal.

The Motely Fool report points out that Prologis believes industrial space rents will keep growing even as the industry continues to build new supply and Amazon pulls back on adding capacity.

That above stated, the coming months will provide a telling tale as indications continue that retailers likely have too much inventory being stored at this point. We noted a Bloomberg Intelligence analyst indicating that the retail industry is holding at least 20 percent more inventory than they have on average over the past three years.


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