Amazon’s huge warehouse growthDanSmo
Amazon’s mega distribution network is on an epic growth pace, CoStar reports.
What Amazon is building is unprecedented in U.S. commercial real estate, in terms of focusing on creating a collection of industrial buildings that are so large. The Great Pyramid of Giza, which stood as the tallest structure in the world for more than 3,800 years, has a base that can contain about 10 football fields. Amazon’s new mega buildings are typically six times larger.
So goes Amazon’s seemingly relentless effort to open mega-warehouses — ranging from 2 million to over 4 million square feet — all over the country, even in smaller markets, with several dozen more in the pipeline as it fills in its U.S. distribution network. Giants such as Walmart and Target, as well as other traditional retailers, have all been strengthening their logistics networks to fill online orders. But none have been building the backbone of behemoth fulfillment centers that Amazon has over the past few years.
There are unique risks to this building initiative: The structures could turn out to be too large for other businesses to occupy should Amazon’s strategy change, leaving communities with white elephants. And municipalities across the country remain divided on whether these massive structures help their quality of life or threaten to overwhelm them.
Dealing with these concerns is made more difficult by the secretive way Amazon makes real estate decisions, cloaking projects in code names, oftentimes requiring potential partners not to disclose information about them and offering few details. And the company sometimes flat-out cancels projects and moves elsewhere rather than engage with the larger issues.
Before the meteoric rise of online shopping, companies would have some national distribution centers across the country that would feed into regional or local warehouses. Amazon has not only disrupted traditional retailing by letting consumers shop at home, it’s now adopted a very specific industrial strategy to serve its booming e-commerce business by assembling a large collection of enormous, multistory robotic warehouses.
Amazon currently has 62 U.S. warehouses that are 2 million square feet and larger in operation, totaling 166.4 million square feet, according to Montreal-based supply chain and logistics consultant MWPVL International. And there are 39 of those massive fulfillment centers, totaling 121 million square feet, that are either under construction or proposed and pending local approvals, MWPVL said. So even though Amazon recently announced plans to put the brakes on its breakneck U.S. distribution expansion, it still has a substantial pipeline for its mega-warehouses.
Amazon’s aggressive rollout of huge warehouses, a strategy unique to the company, follows a cookie-cutter formula. Its gargantuan warehouses typically have multiple mezzanine levels, or stories, with five levels slated for Niagara. They incorporate Amazon’s state-of-the-art robotics technology. A number of the warehouses are located in secondary and tertiary markets, such as Niagara.
Business for Developers
Industrial developers are benefiting from the extra business from the construction. The roster of developers that have built Amazon mega-warehouses includes well-known names in commercial real estate: Trammell Crow, Prologis, Panattoni Development, Hillwood Development and Seefried Industrial Properties.
One developer, USAA Real Estate, last year had a $2.7 billion bond offering to raise money to complete 13 distribution and fulfillment centers leased to Amazon, including a 2.4 million-square-foot one at 800 Pine Meadow Drive in Pooler, Georgia. S&P Global Ratings appraised that distribution center at $331.5 million.
In some places, residents and officials fear the truck traffic such warehouses will generate or how they will change once-bucolic landscapes and disrupt the environment, which ends up putting the kibosh on the proposed projects. And if Amazon eventually decided to vacate one of these giant sites after occupying them, it could prove difficult to find another industrial tenant for such a huge space, a concern at least one developer has expressed.
But in other markets, Amazon is welcomed with open arms, so the company can look for another municipality in which to build if it isn’t welcome in its first choice. In several states, its mega-warehouses represent landmark developments in terms of size. Amazon Project Sam, a 3.6 million-square-foot distribution facility built by Panattoni, was billed as the single largest real estate project in Tennessee when it opened last year.
Amazon’s $230 million robotic fulfillment center in Suffolk, Virginia, which the company owns, at 3.8 million square feet was described as the second-largest building in the Old Dominion. The 3.85 million-square-foot fulfillment center being developed in Woodburn, Oregon, is touted as one of the largest buildings in the Beaver State’s history. And, at 3.08 million square feet, the $300 million warehouse that Atlanta-based developer JB2 Partners has proposed for Niagara would be the largest project that town has ever seen, as well.
In September, Amazon debuted a 3.8 million-square-foot fulfillment center — the size of 66 football fields — in Wilmington, Delaware, which company officials described then as the largest such facility it had open as of that date. But that one, built on the site of a former General Motors assembly plant, may soon be topped. A 4.06 million-square-foot facility is now under construction at 8900 Merrill Ave. in Ontario, California. Developer Prologis declined to comment on whether the online retailer will be the tenant. Amazon confirmed that it plans to open a large new distribution facility in Ontario later this year, but it declined to provide its address.
However, Amazon has overwhelmingly been the company leasing enormous warehouses — build-to-suit developments — and brokers in the Inland Empire market said the e-tailer was expected to be the occupant on Merrill Avenue in Ontario.
Efforts to get approval for the projects are often cloaked in secrecy, perhaps to help forestall any opposition. When the developer that Amazon is working with files plans for the warehouses with local governments, officials sometimes agree to not disclose details of the projects or the e-commerce company’s involvement.Critics have charged that this process isn’t transparent and doesn’t allow full disclosure to the public.
In Niagara, officials initially declined to identify the tenant for the large warehouse planned for 8995 Lockport Road, on a cornfield adjacent to Niagara Falls International Airport. But last week, Maura Kennedy, an Amazon economic development manager, appeared at a county planning board hearing to acknowledge that the e-commerce company planned to use the five-story facility as a fulfillment center, according to a report in the Buffalo News.
The project is “prototypical” for Amazon and nearly the same as the one originally planned for Grand Island, said John Bancroft, a partner with developer JP2 Partners, according to the Buffalo News report. It would function as a “first-mile operation” where trucks would bring in merchandise that Amazon sells to be sent out to other locations in the company’s logistics network, including “last-mile” sites where the company has its delivery vans.
Like other mega-warehouses, the Niagara project was given a code name that didn’t reveal Amazon’s involvement: Project Fifi. In Wisconsin, the identity of a warehouse occupant — which turned out to be Amazon — was initially kept under wraps, with the project identified as Project Silver Eagle. In Virginia, a planned warehouse was referred to as Project Roxy.
Once they are built, Amazon typically identifies and names its big fulfillment centers with the initial code of the nearest large airport. For example, the Wilmington facility is called MTN1, getting its moniker from Martin State Airport in Maryland.
And when Amazon finally officially announces one of its mega-warehouses, press releases will often only include the property’s first-floor square footage, usually just 650,000 to 850,000 square feet, but not the fact that it’s going to be a multistory building whose total square footage is several times that of the ground floor. That’s information that could immediately trigger alarms for development opponents and neighboring residents.
These mammoth distribution facilities, even in small markets, put Amazon ever closer to shoppers, facilitating quick delivery, according to brokers and logistics analysts. Big logistics hubs located in less densely populated and underdeveloped regions also provide Amazon better prospects to find labor for its warehouses, as well as offering land that is not only available but less pricey than places such as, for example, North Jersey, which is sandwiched between New York City and Philadelphia and near major airports and seaports.
Amazon has been on a binge in terms of expanding its distribution network, especially during the COVID-19 pandemic, which accelerated the growth of online shopping. As part of that growth, Amazon has placed some of its mammoth logistics centers near major cities, such as Detroit, but others fall in smaller markets such as Canton, Mississippi; Colorado Springs, Colorado; Suffolk and Henrico, both in Virginia; Shreveport, Louisiana; Liverpool in upstate New York; Papillion, Nebraska; Woodburn, Oregon; Churchill, Pennsylvania; Mount Juliet, Tennessee; Pflugerville, Texas; Arlington, Washington; Pooler and Appling, both in Georgia; and Cottage Grove, Wisconsin, according to CoStar data.
Betting Bigger Is Better
Overall, Amazon was leasing 370.4 million square feet of space for distribution and data centers, and owned 16.7 million square feet of such properties, in North America as of Dec. 31, according to a recent securities filing.
Amazon officials are secretive about their distribution strategy, but a company official offered some guidance on its development plans recently. During a fourth-quarter earnings call on Feb. 3, Amazon Chief Financial Officer Brian Olsavsky said the company intended to “moderate” its industrial growth. What he didn’t discuss is that Amazon already has a lot of giant fulfillment sites in the works.
Some real estate officials are trying to parse out exactly what Olsavsky meant and what the repercussions could be.
“What they said on the earnings call [is] a little bit difficult to interpret, as they said that they were going to slow or reduce their investment,” Peter Baccile, CEO of First Industrial Realty Trust, said during his own company’s recent fourth-quarter earnings call. “As you know, they lease and they buy and they own their own warehouses. As far as market activity goes, we have not seen any drop-off. And the demand today is very, very broad-based.”
However, Amazon has taken the big-is-better approach to the max and has a very specific mega-warehouse strategy, according to Baccile. He told Wall Street analysts that his industrial real estate trust wasn’t interested in doing those kinds of risky projects because it believed at some point Amazon would begin to “rationalize” its space.
“And that’s why we have not chased them to the secondary and tertiary markets,” he said. “And that’s why we don’t own any of their seven stories of [mezzanines], full of robotics, the special-purpose properties. We’ve stuck to our disciplined focus on the coastal markets and delivering property that appeals to a much more broad set of potential tenants.”
It’s true that Amazon isn’t the only company interested in opening larger distribution centers. Big warehouse leases hit a record last year, driven by not only e-commerce but traditional retailers.Walmart, one of the world’s biggest retailers, has opened several U.S. warehouses that are about 1 million square feet, most recently in Olive Branch, Mississippi. And footwear retailer Nike also has some big distribution facilities, including one that’s 2.8 million square feet in Memphis, Tennessee.
Amazon’s Ideal Warehouse
Amazon doesn’t comment in detail about its future plans for distribution development, according to company spokeswoman Lisa Campos. But she offered a broad outlook at what it wants in a warehouse site. “We typically look at each location and what’s available and then determine the best outcome,” the spokeswoman said in an email. “We’ve built a network of modern, hi-tech facilities in towns and cities across the world — all to make sure our customers get what they want, when they want, wherever they are.”
But Ryan Hester, a lead engineer with Amazon’s Global Engineering Services design and construction, offered some insight into its mega-warehouses in a recent post on LinkedIn. He said his first big technical project at Amazon was as the lead in developing a template for a large “Generation 11” robotic facility, at roughly 3.56 million square feet and five
stories. It “created a consolidated, more efficient automated design type,” according to Hester.
Three years later, he gave a tour of an Amazon mega-warehouse, called HOU6, that’s located at 10507 Harlem Road in Richmond, Texas. It fits the template he helped develop: It has 3.7 million square feet and five stories. It debuted last fall and was developed by Trammell Crow. “This building is absolutely incredible and is the most complex end-to-end functional building that I have ever set foot into,” Hester said on LinkedIn.
Warehouse Workers, Truck Drivers
Rob Handfield, a professor of supply chain management at North Carolina State University, said Amazon’s huge facilities in tertiary markets may reflect the company looking for sites where it can not only ship to multiple cities within 24 hours but also find workers. “The thing is Amazon recognizes that there’s a labor shortage,” Handfield said. “Labor is becoming a critical bottleneck right now. They’re saying, ‘Maybe we have to look in parts of the country where there’s not a lot of industry, where there are people who may be looking for jobs and they’re unskilled and we can pay them $18 an hour with benefits and we’ll become a major employer.’”
Ponsen raised the labor issue in regard to truck drivers. “The longer the trucking route, the harder it is for Amazon or its competitors to find drivers willing to traverse them,” he said. “These mega sites help break up the routes truckers are taking to bring goods from one stop in the supply chain to the next. They also give Amazon locations to briefly store huge amounts of inventory before delivering those products into population centers, which tend to have much higher rents for logistics space.” Overall, Handfield said Amazon is seeking a combination of plentiful labor and cheap land that’s not too far from major cities.
David Silverman, a senior director at Fitch Ratings, had a similar take on Amazon’s industrial game plan. “It’s a pretty complex strategy that they have about maximizing fulfillment, distribution, etc., that includes some larger centers that could be farther away from centers of population,” Silverman said. “They can do that, too, for the purposes of finding cost-effective real estate at the size that they want.”
Amazon has to serve a variety of needs with its logistics network, according to Silverman, not only fulfilling orders placed on its website but also providing distribution points of contact with customers when it opens mega-warehouses.
“It could be less to do with that they are necessarily seeing a lot of growth in Colorado Springs or a particular market in Tennessee,” he said. A huge warehouse “could be used for a different kind of element of the strategy, or element of the part of the supply chain, as they are focused on other avenues for getting close to the consumer — for example, their own retail stores or the Kohl’s partnership or the Lockers,” self-service kiosks where shoppers can pick up their packages, or drugstore partnerships.
Olsavsky’s comments during the fourth-quarter earnings call seemed to bear out what Silverman said. “We like the progress we’ve made developing our Amazon logistics capability over the last few years,” Olsavsky told Wall Street analysts. “And we’ve been adding — as we’ve mentioned, we’ve doubled the capacity in the network over the last two years. That is not all just to handle today’s volume. It’s also to handle getting closer to the customer and being able to ship faster. So, we like where we stand. We know there’s work to do on improving our customer service. We like the progress we’re making lately, but we think that future is bright on that dimension.”