Amazon Crushes Building Materials Supply Chain, Sends Shockwaves Through Construction Industry
“Sorry, I can’t help you. Amazon has bought everything in production for the next six months.”
That is the response Andrew M. Smith, president of Dallas-based McRight-Smith Construction, got from a national supplier of steel joist and deck materials when he set out to build a medical office facility in the Dallas-Fort Worth area last year. Despite placing the order 20 weeks in advance, the supplier quoted a lead time of at least 40 weeks, causing Smith to seek out a smaller company to fabricate the materials by hand. That alternative pushed the cost from $65K to $99.5K while shaving 24 weeks off delivery time, he said.
“That’s the choice people are having to make,” he said. “Are you willing to spend more money to go an alternate route, or do you extend the length of the construction project?”
Supply chain bottlenecks have plagued the construction industry for several years now, creating unusually long lead times and prohibitive spikes in price. There are many factors driving delays, including the shuttering of factories overseas, backups at U.S. ports and global labor shortages. But few things have been as disruptive as the pandemic-driven rise in online shopping, a trend dominated by e-commerce giant Amazon.
“When you’re talking about fulfillment centers, think of them as cash registers,” said Marc Wulfraat, founder and president of supply chain consulting firm MWPVL International Inc. “If you’re going to increase product sales revenue because you are selling more stuff, then you need more square footage.”
Amazon’s real estate footprint has increased dramatically over the past few years. At the end of 2016, the company had 97.3M SF of ground-level real estate in the U.S., according to data provided by MWPVL. The latest figures show an increase of 370%, with the company set to grow to 457.3M SF by the end of this year.
Amazon didn't respond to Bisnow’s request for comment despite multiple attempts.
Wulfraat said Amazon was in the midst of expanding its warehouse footprint prior to the pandemic, but the crisis led the company to embark on a massive spending spree to try and meet demand. According to data from PYMNTS, nearly 60% of all online retail purchases in the U.S. were done on Amazon in 2021.
“There’s a two-prong thing going on,” Wulfraat said. “The ability to support sales growth and the need to get closer to the customer.”
Amazon’s growth has disrupted countless industries. A February 2021 report by Colliers said the company's rapid-fire acceleration of warehouse construction activity exerted significant pressure on the supply chain for building materials. The report pointed to an unnamed U.S. steel producer that said orders for construction projects related to Amazon comprised about 33% of its national capacity, which had pushed lead times to a 20-year high.
The report also referenced guidance from national industrial contractor ARCO Design/Build Industrial, which advised customers to expect price increases for joist, girder and deck material that could lead to an overall construction cost increase of $1.30 per SF.
Certain materials, like steel joists and decking, are only available in bulk from a handful of U.S. suppliers, Smith said, so once Amazon has eaten up the supply, it can be difficult to know where to turn. Other materials, like concrete, can’t travel far and have to be sourced locally, which can also be problematic if a nearby Amazon fulfillment center is under construction.
“When you have someone that is pouring 2M SF of concrete like Amazon was doing, that’ll take all of one or two or even three batch plant capabilities for the day,” Smith said, referencing a large Amazon fulfillment center project in Austin, Texas. “So while those guys are taking all of that out, everyone else is waiting around because they can’t go any further out — they still have to have local concrete as well.”
Many companies had the foresight to order materials months in advance, but only some institutional giants like Amazon have enough capital to stockpile materials. This has given the big guys a serious advantage, said Fred Ragsdale, an associate with JLL Dallas’ Industrial Services group.
“Smart money that had capacity, and the ability to do it, went out and started buying up certain materials because they knew what they had coming down the pike,” he said.
Delays caused by materials shortages are behind dramatic spikes in price across the construction industry. Prior to the pandemic, Smith said his company was accustomed to cost increases for steel of between 3% and 5% over one or two quarters. Now, he said, it is no longer uncommon to see the price of steel double in that same time frame. Despite these jumps, Smith advises clients to pay the additional cost.
“We know what the costs are now; we don’t know what is going to happen in three, four or five months — we are seeing prices move that fast,” he said. “We were able to hold bids in the past for 30-60 days, in some cases 90 days. The most I can get subcontractors to hold bids now is three weeks.”
Amazon and the shift to e-commerce isn't entirely to blame for cramps in the supply chain. Other factors, like tariffs issued by the Trump administration that are still in place, also play a role, Smith said. And inflation has only made things worse.
“Everything has kind of come together for this perfect storm,” he said. “So we just keep seeing things go up.”
Recent data from the U.S. Census Bureau showed construction costs hit their highest point in 50 years in 2021, according to a report by NBC DFW. Prices increased by 17.5% year-over-year between 2020 and 2021, and last year’s costs were 23% higher than 2019, per the data. As of February, the cost of lumber had increased by 85% over three months.
“That’s the type of [jump] that can put projects at risk for not moving forward,” Smith said.
Despite these issues, most developers are finding workarounds, Ragsdale said, such as sourcing materials directly from overseas manufacturers or operating on a more narrow scope until materials are available. These solutions appear to be working. New industrial supply in the U.S. totaled 87.2M SF in Q1 2022, an increase of 17% over Q4 2021 and 28% above the five-year average for first-quarter deliveries, according to Cushman & Wakefield.
“There’s generally a way to mitigate,” Ragsdale said.
Fortunately for the construction industry, the rate at which Amazon builds its fulfillment centers is expected to slow after 2022, according to MWPVL. A just-released report by Newmark said Amazon recently withdrew plans for at least some of its new industrial projects, though it had 200 in the pipeline.
Wulfraat said some of the pullback might be due to a shift in fiscal management that came with the changing of the guard from Jeff Bezos to Andy Jassy. Jassy took over as the e-retail behemoth's CEO in July.
“They’re really emphasizing the word ‘focus,’” Wulfraat said. “Let’s focus on the areas of business where we are making money, and let’s make sure we haven’t put ourselves in a situation where we’re over capacity or overcapitalized.”
A lack of available workers, a challenge faced by not only Amazon but the industrial community as a whole, could also be driving some of the scaling back. A survey released in February by Instawork, a flexible staffing business, found that 73% of light industrial businesses had issues with recruitment, up from 26% in 2021. This is especially challenging given the sector’s massive surge in demand: 58% of those businesses saw fulfillment volume increase over the last 12 months, and 75% said they felt unprepared for 2022.
“[Amazon is] hitting a point in their history where if they go out and add more space, can they even find the people to staff those buildings?” Wulfraat said. “We are hitting some pretty serious junctures now where the only way to get more labor is to add substantially to the wage rates you’re already offering.”
The deceleration of fulfillment center growth should provide some relief to the supply chain of building materials, but Wulfraat said other areas of Amazon’s operations are on the precipice of growth. The company is investing millions in expanding its transportation capabilities, for example, so it can reach more customers without relying on the postal service or UPS.
“That growth has everything to do with Amazon laying the railway tracks for tomorrow,” Wulfraat said. “That build-out involves hundreds of buildings and millions of square feet of warehousing space that has nothing to do with product service.”