Is There an End to Amazon’s Impact?
The absorption of industrial real estate is setting all-time highs as consumer demand, with COVID-19 as its catalyst, has shifted to a greater dependency on consumers having products shipped to them rather than them visiting brick-and-mortar retailers.
While COVID has been a bust for many small retail stores, those that were able to leverage their physical presence with an online marketplace saw robust gains in sales as well as market share. This resulted in the consolidation of consumer buying options into just a handful of megaretailers, including Walmart, Target, Home Depot and Wayfair.
Meanwhile, Amazon has seen its market capitalization grow from an already staggering $920 billion in 2019 to an even more astronomical $1.68 trillion over just 24 months. Consumers have spoken and the investment community has reacted accordingly.
In that same two-year period, Amazon’s network of physical distribution space more than doubled from 195 million square feet at the end of 2019 to over 420 million square feet, making Amazon the largest absorber of industrial real estate in North America for several years in a row. Not focused just on last-mile fulfillment centers, Amazon has absorbed over 20 distribution centers since 2019 that measure 2 million square feet or more.
But how long can this trend continue? There has also been a push for mega online retailers to increase their distribution network so that they can deliver product quicker and at a lower transportation cost. Thus, much of the industrial absorption has been fueled by these select retailers leasing large distribution centers in as many metropolitan markets as they deem necessary to get them closer to their customers.
Where’s the Saturation Point?
But at what point is there a sense of saturation in their need for distribution facilities? Once Amazon, and the other handful of large e-commerce retailers, reach that saturation point will there be a significant slowdown in industrial absorption? Is there a point of saturation that will come sooner rather than later?
The industrial vertical has been reliant on Amazon for much of the new market absorption. But, at some point Amazon will establish some semblance of their optimal network and will not thirst for such robust new absorption. Once this is built out, there will still be a need for new industrial distribution space as they, too, will need to continuously refine their network strategy as well as develop newer and more efficient facilities to keep up with innovation in automation.
Even if Amazon’s network matures and its neck-snapping rate of absorption wanes, demand for industrial products will continue. Industrial growth will likely not slow as the pressure is on to revisit fragile supply chains and consider nearshoring or onshoring of production.
Mexico will continue to gain favor as the best option to support American consumption. This will lead to greater industrial development in gateway markets. Nearshoring will mean more advanced manufacturing jobs for North America, which will also be an area of growth for the industrial sector.
There is currently 700 million square feet of industrial real estate in the development pipeline in the United States. The investment community is also bullish about the future of industrial as the brightest (and potentially safest) spot in commercial real estate.
Amazon’s amazing level of industrial absorption is just the beginning of how brick-and-mortar retail, distribution, and even manufacturing will continue to evolve, and perhaps even morph into a combination of the three verticals. Nonetheless, the common foundation is a need for more industrial development.