Recently, I have heard the phrase “The Amazon Effect” in many conversations regarding future development.
The relevant questions seem to be:
-What happens when Amazon reaches a saturation level in markets?
-Is Amazon taking down large spaces as a defensive or predatory move?
-Will this new hybrid retailing have a significant effect on Amazon and their space demands?
-How will the carbon tax initiatives currently being negotiated on a global stage potentially affect the pricing of imports, consumer demand and demand for distribution facilities?
The concerns are especially significant in markets that have major speculative developments underway. Many of these developments have underwriting assumptions based on recent massive industrial absorption, which has been primarily driven by Amazon and the considerable increase in online shopping during the pandemic.
Last week, I was a bit shocked when I heard a broker say that Amazon is “not that big of a player, since they only account for about 10% of the demand nationwide”. That statement feels like an oxymoron to me. Any single company that accounts for 10% of a nationwide market is a significant force, even more so when they are such a prominent factor in so many individual markets.
Some brokers have told me they believe Amazon has already reached the saturation level in their markets, and there is a corresponding slowing down of absorption and softening of prices. But, overall, we are experiencing the opposite in most markets where we and HPP have product and are currently buying.
When I was in college, the conventional wisdom was Sears would rule the retail world for the foreseeable future. They were the largest retailer, had just bought Coldwell Banker (now CBRE), Allstate Insurance, Discover Card, and multiple other brands. Next came K-Mart that was going to monopolize retail, then Target, Walmart, Price Club/Costco, and so on. No one could predict Amazon’s future dominance or even the possible emergence of online shopping. The closest thing at the time was catalog shopping.
This is one of the advantages of experience and one of the drawbacks; my instinct tells me there will be another shift, and a new player will emerge, replacing Amazon as the dominant player. Will hybrid retail-like Warby Parker, Bonobos, etc., be the new emergent model, and will malls get reinvented to accommodate this new retail? And how will this shift in the supply chain affect industrial real estate? Alternatively, being the old guy makes you very susceptible to missing a paradigm shift, which online shopping appears to be.
Usually, when we send out these blog posts, we try to convey what we predict is happening or where we see value. At this time, however, I am unsure what will happen next with the multitude of uncertainties out there, which are too numerous for one blog post.
I would invite brokers to respond to this post and tell us what you are experiencing, specifically in your markets and any shifts you see coming. In the meantime, during these uncertain times, I revert to trying to stay within the fundamentals of basic industrial real estate, knowing there will always be a need for local manufacturing and distribution. Ultimately, real estate bought on the right basis with a quality location will survive any market disruptions, including “The Amazon Effect.”
