Amazon Buying Its Own Warehouse Space: Will That Hurt Industrial REITs?

The COVID-19 pandemic greatly changed the way Americans shopped. Online purchases soar as people stayed home in fear of going into malls or stand-alone stores. Suddenly, companies like Amazon.com Inc. AMZN found themselves needing additional warehouse space to store and ship out customer merchandise.

Amazon doubled its warehouse space from pre-COVID levels and became a significant tenant for several industrial REIT landlords. By the end of 2022, Amazon was leasing approximately 392 million square feet of warehouse space across North America.

But Amazon’s leasing expansion has mostly come to a halt now that the company has started purchasing its own warehouse space. By the end of 2022, Amazon had increased its ownership of warehouse and distribution space to 22 million square feet.

The share price of several industrial REITs declined more than 25% in the spring of 2022 after Amazon stated it would be cutting its logistics network costs due to an oversupply of warehouse space. This was interpreted by Wall Street to mean that Amazon will continue giving up its leased space.

If this trend continues, how will that affect the industrial REITs that have Amazon as a large tenant? Amazon CEO Andy Jassy previously stated that Amazon is trying to become "more efficient" with its warehouse portfolio and has recently begun subleasing some of its space to other companies.

Below are three industrial REITs that could lose significant revenue if Amazon decides to pull the plug on leasing for good:

Prologis Inc. PLD is a San Francisco-based industrial REIT that owns and manages 4,914 industrial logistics properties from New York to California and in 18 other countries.   

During Prologis’ second quarter 2022 conference call, Chief Customer Officer Mike Curless was asked about Amazon’s announcement that it would be unloading a great deal of leased space because of overcapacity. Curless responded that Prologis was 99% occupied in areas where Amazon was leasing space and that existing rents were 54% below market, so finding new tenants would not be difficult should Amazon terminate its leases.

At the time of Curless’ comment, Amazon was renting about 33.4 million square feet from Prologis, almost 5% of Prologis’ total net effective rent. While finding new tenants could be easy, there is often significant expense and lost revenue from the time a large tenant leaves until a new tenant moves in. New build outs, carrying costs and rent incentives could significantly impact Prologis’ bottom line.

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Stag Industrial Inc. STAG is a Dallas-based industrial REIT that owns 111.6 million square feet in 563 properties across 41 states.

At the end of 2022, Amazon was Stag Industrial’s largest tenant, renting seven warehouses and accounting for 3.2% of its annualized base revenue.

Another issue for stag could be other large companies following Amazon’s lead and start buying warehouses. As 2022 ended, about 40% of Stag Industrial’s leased space was to e-commerce companies. While its tenant portfolio is well diversified with 45 industries across 60 markets, Stag Industrial’s risk of tenant loss would seem to be greater than that of Prologis.

Industrial Logistics Properties Trust ILPT is a Newton, Massachusetts-based industrial REIT that owns 60 million square feet of space in 413 industrial and logistics properties across 39 states. Its website reports that it has a 99.2% property occupancy rate, which is extremely high for a REIT.

As of September 2022, Amazon was providing Industrial Logistics with 6.8% of its annualized rental revenue, the largest percentage of any REIT leasing space to Amazon. Industrial Logistics already has a major debt problem resulting from its February 2022 acquisition of Monmouth Realty Trust and its $323 million of debt. The acquisition forced Industrial Logistics to slash its quarterly dividend from $0.33 per share in April to $0.01 per share in July.

Industrial Logistics’ share price has been in a downward spiral ever since the dividend cut was announced, falling from over $22 a year ago to a recent price of $4.19. With Amazon’s new direction, Industrial Logistics, more than any other industrial REIT, could find itself with declining revenue.

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