Amazon Ramping Up Industrial Acquisitions In Pivot Away From Leasing, Sources Say
The largest private occupier of U.S. industrial real estate has begun to shift its strategy away from leasing warehouses, a decision that could upend what has become the preferred asset class for commercial real estate investors over the last 18 months.
Over the course of the last year, Amazon has gone from being indifferent on whether it leases or owns the millions of square feet that make up its industrial empire to preferring to buy and develop its own facilities, several industry sources with knowledge of Amazon’s activity tell Bisnow.
Amazon has changed its approach to the industrial real estate market and its relationship with the developers who typically build and lease to the company, sources said. In some cases, it has backed out of lease discussions in order to pursue acquisitions, one source said. Others said the trillion-dollar company has been showing up to bid on sales for the types of properties that it previously would have leased from developers.
The e-commerce giant has spent at least $450M over the past year to acquire industrial properties and development sites, Bisnow has found. Sources expect Amazon will continue to ramp up this buying activity, as the investments allow it to capture the value premium that it creates for an industrial property and for years has passed along to its landlords.
The shift, still in its early stages, has captured the attention of the industrial market in recent months, with sources describing frequent conversations among brokers and developers about what Amazon has planned for its distribution footprint. A change in its strategy could have massive implications for the market for industrial properties, which have increased in price 16.9% year-over-year and more than 41% over the past three years, according to Real Capital Analytics.
“I don’t know Jeff Bezos. He’s a pretty aggressive guy, a bright guy,” Chicago-based industrial broker Hugh Williams said. “If you recognize you’re doing billions of dollars worth of real estate around the world every year, maybe you think to yourself, ‘Why don’t I just do that? Why don’t I own that?’ It makes sense to me.”
Amazon has contributed more than any other company to the growth in prominence and value of distribution facilities, leasing them up in huge numbers across the country to build out its supply chain for delivering goods to customers.
Last fall, Amazon Vice President of Real Estate and Global Facilities John Schoettler told The Wall Street Journal the company was “really agnostic” about whether it owned or leased real estate, as long as the building was the right fit. While it may not have had a preference, Amazon has historically leased far more space than it bought, generating hundreds of millions in profits for developers that have sold buildings leased to the e-commerce giant.
“We’ve seen multiple deals throughout the country where Amazon industrial properties are setting a new high-water mark in local markets from a price-per-square-foot standpoint, and setting a new record low on cap rates,” Colliers National Director of Capital Markets Research Aaron Jodka told Bisnow. “Amazon is certainly seeing this, and by owning real estate, they’re able to participate in the value creation of their occupancy.”
Jodka said he has heard more over the past few quarters that Amazon is looking to own industrial assets. He said this strategy, which is also being employed by the largest big tech companies in the office market, allows companies to reap the benefits that their brand and credit create for the value of an asset.
Amazon, through a spokesperson, declined to answer detailed questions about its real estate operations, instead issuing only a brief statement.
“We continually explore our real estate options to ensure we find sites that offer the best employee experience while delivering great results for our customers,” Amazon spokesperson Barbara Agrait said. “There is no one-size-fits-all approach to meeting our real estate needs. Each prospective site is evaluated individually taking into account many factors including people, community, physical space and access.”
KBC Advisors, the low-profile Seattle-based brokerage firm that has worked with Amazon on much of its industrial real estate activity, including site selection, leasing and development, also declined to comment for this story.
Amazon has five main types of distribution and warehouse facilities in its network, according to a source that has developed several properties for the tech giant: massive sorting facilities that tend to be more than 3M SF and multiple floors; non-sorting fulfillment centers that exceed 1M SF; inbound and outbound cross-dock facilities between 300K and 600K SF each; and last-mile facilities that can be upward of 250K SF but are close-in to major population centers.
The development source said the Seattle-based retail giant has expressed a preference for owning its last-mile delivery centers and its sorting and fulfillment centers larger than 1M SF.
Another developer said his firm is still smarting after Amazon pulled out of a lease deal near a major U.S. city after he was told Amazon real estate executives wanted to “press pause” on some further leases. While Amazon reimbursed his company for the work it did before a lease was to be executed, the developer said the backoff decision was still frustrating.
“I mean, we were at the one-yard line,” said the developer, who like many who have worked with Amazon over the years, declined to go on the record because of confidentiality agreements and to avoid blowback from Amazon. “We spent 18 months putting this site together.”
A third industrial developer, based in another major U.S. metro, said he has done six lease deals with Amazon, but none in the past year. He said he has noticed a trend this year of Amazon leaning more heavily toward owning its distribution facilities.
“The way I’m understanding it, and the way it’s been explained to me, is the preference is always strongly to purchase,” he said. “However, if they have people they’ve done business with in the past, they’ll do lease deals. If they’re told purchasing's not an option, they’ll still do a deal. But they’ll push as hard as they can to try to own.”
That source also said he thinks Amazon may eventually sell the assets after they have appreciated in value.
“They’re just tired of developers and institutions making a shit ton of money on their credit,” the developer said. "They’d want to control the land and the building, and they might subsequently sell it."
Before pivoting even harder this year, Amazon had already been in the process of increasing the amount of real estate it owns. It reported owning more than 5.6M SF of fulfillment, data centers and other commercial real estate — excluding office space and physical stores — in North America and 2.57M SF internationally at the end of 2019. By the end of 2020, it owned 8.4M SF of non-office and retail real estate in North America and 3.5M SF internationally, according to its annual report.
Amazon’s owned portfolio is still dwarfed by the amount of real estate it leases. Between 2019 and 2020, the amount of non-office and retail space that Amazon leased jumped from 187M SF to over 285M SF across North America.
A lease with Amazon for a warehouse has been a golden ticket for developers and third-party owners who sell to institutional investors.
Between January 2020 and May 2021, 83 transactions have involved buildings where Amazon is a tenant, accounting for 7% of all U.S. industrial sales volume during that time period, according to a report from CommercialEdge. Those Amazon deals traded at an average of $145 per SF compared to $94 per SF for all sales in the market, according to the report.
“The reality is, as you know and everyone knows, Amazon has a tremendous amount of cash. So it's obviously not a problem to finance and own a certain amount of buildings themselves,” a source who has developed Amazon warehouses told Bisnow. “They are building and financing buildings themselves.”
Over the past 12 months, Amazon affiliates have acquired at least 14 properties for more than $450M combined, according to analysis of property records in the Reonomy database. The largest of those deals include:
- The $200M purchase of a 6-acre parcel that includes parking lots and waste maintenance buildings at 900 Seventh St. in San Francisco in December.
- The $49.8M purchase of the shuttered Showcase Cinema de Lux at 565 Squire Road in Revere, Massachusetts, in May.
- The $8.9M purchase of a 16K SF industrial building and the $35M acquisition of a former steel manufacturing facility, both on the west side of Chicago, both completed in June.
- The $26.5M purchase of a 230K SF warehouse on 25 acres in King of Prussia, Pennsylvania, in July.
- The $75M purchase of 52.6 acres of vacant land in East Pleasanton, California, in a deal that closed Sept. 16.
In March, Amazon also purchased the Cortana Mall in Baton Rouge to tear down and replace with a robotic prototype distribution center. In the past month, the company bought 14 acres of vacant land in Bessemer, North Carolina, near a previously announced robotics hub, and 30 acres in Tallahassee, Florida, where it plans to construct a 123K SF distribution facility. Bisnow found other land deals in Colorado, Michigan and Georgia in deals that cost Amazon less than $5M each.
Logistics Property Co. Senior Vice President Mark Glagola, who joined the development firm last year after over a decade as an industrial broker with Transwestern, said he has heard talk about Amazon looking to buy industrial properties, but he has only seen one instance of it closing on an acquisition in his market: a $91M acquisition in Baltimore in February 2020.
“We’ve seen them in a lot of bid processes, they’re showing up in a lot of situations,” Glagola said. “Like every company, they want to control their own destiny.”
Williams, a principal with MK Asset Management, said he has seen Amazon chasing multiple development sites in his home market of Chicago, including the two it acquired over the summer.
When Amazon in July paid $35M for the former steel plant at 3000 West 51st St. in Chicago, a spokesperson for the company told the Chicago Sun-Times it planned to turn it into a delivery station, with construction expected to launch in 2023. Before Amazon bought that site, Williams said he had worked with industrial developers who had looked at potentially acquiring it.
“They probably couldn’t have paid what Amazon could pay,” Williams said. “When you’re dealing with a company like Amazon, if they really want something, they’re going to get it, because you can’t outspend them.”
Because Amazon is the end user of any site it acquires, it doesn’t have to ensure a spread between the building's income and its sale price, and it doesn’t have to assume the risk of trying to lease up a property. Those factors allow the company to bid more competitively, Williams said.
Like the other industrial experts Bisnow spoke to for this story, Williams acknowledged that Amazon has long been the dominant force in the warehouse leasing market, so regardless of whether it prefers to own or rent, the market will have to adjust.
“When you dance with the bear, be prepared to let the bear lead,” Williams said. “Amazon’s the bear. They’re in a special, special class.”