Amazon (NASDAQ: AMZN) appears to have had a busy week on the real estate front as it has been tied to several large transactions.
Amazon spending spree?
On June 23, Business Insider reported that the company had signed a deal in New York City to lease its biggest facility ever. The 1 million-square-foot, multistory facility with a 250,000-square-foot delivery station will replace a currently vacant paper factory in Queens. The report also said Amazon was negotiating a lease on a 620,000-square foot facility that is under construction in Brooklyn.
The same day The Real Deal, a real estate news outlet, reported Amazon was planning to open two new fulfillment centers in the Chicago area. The plan calls for the company to build two 855,000-square-foot facilities, occupying one and leasing the other.
On June 24, the Kansas City Business Journal reported Amazon’s preferred real estate developer was looking to break ground on a 700,000-square-foot distribution facility in Kansas City. The report eyed a September 1 start for the $80 million project. A week ago, Commercial Observer, a leading commercial real estate media company, reported Amazon signed a deal for a 156,000-square-foot facility in Los Angeles County.
It doesn’t stop there.
Amazon has even been suggested as a primary suitor for struggling retailers Macy’s (NYSE: M) and J.C. Penney (OTC: JCP). A move into retail real estate would provide the company with a physical presence closer to consumption centers, allowing it to shorten delivery distances to households. It would also give the company the physical presence needed to build out its grocery business, Amazon Fresh. A deal with one or both could also give the company access to brand names that have been reluctant to sell on the company’s website.
Earlier today, Macy’s announced it was laying off 3,900 corporate employees as part of a $630 million restructuring.
Logistics real estate demand accelerating
Ecommerce and e-fulfillment have boomed in recent months in response to the increase in online order activity for household necessities and groceries as many states have been in forced lockdowns during the pandemic. While many localities are taking a phased approach to reopening, which will result in consumers returning to physical stores for their goods, many analysts believe the uptick in online activity is here to stay.
In a research report outlining their bullish outlook for accelerated demand for logistics properties, leading global logistics real estate provider Prologis Inc. (NYSE: PLD) stated ecommerce fulfillment requires more than three times the logistics space than traditional brick-and-mortar retail sales. Additionally, the company sees inventories rising by 5% to 10% in the future as supply chains look to become more resilient and avoid future supply shocks like the one seen at the onset of the COVID-19 outbreak.
Prologis estimates incremental inventory carry will require an additional 285 million to 570 million square feet of logistics space. Further, the company said re-tooling current supply chains to accommodate e-fulfillment solutions would create net demand for an additional 140 million to 185 million square feet.
Amazon’s deep pockets
Amazon generates significant cash flow, its primary source for real estate investment, from its nearly $300 billion in annual net sales. At the end of first quarter 2020, Amazon reported more than $24 billion in free cash flow on a trailing 12 month’s basis. Excluding equipment finance leases and principal repayments of finance leases and other financing obligations, Amazon generates nearly $12 billion in free cash flow annually.
The company spent $11.3 billion in cash capital expenditures (capex) during 2019, $12.7 billion in 2018, primarily on capacity in its fulfillment operations and technology infrastructure for its cloud computing services unit, Amazon Web Services. Amazon spent nearly half that amount in the first quarter of 2020 alone, recording $5.4 billion in cash capex for similar investments. The company ended the quarter with more than $27 billion in cash and $22 billion in marketable securities.
At the close of 2019, Amazon leased and owned nearly 275 million square feet of fulfillment and data centers globally. Data provider Statista estimates there was 10 billion square feet of warehouse and distribution space in the U.S. during the first quarter of 2020.
When reached for comment, Amazon spokeswoman Jen Crowcroft said “Amazon does not comment on rumors or speculation.”
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