Is Amazon Becoming a Real Estate Company?
Amazon Inc. (NASDAQ: AMZN) is one of the largest publicly traded companies in the world and has made a name for itself with consumers around the world. After acquiring Wholefoods in 2017; Launch of Amazon Prime, which includes Amazon Originals, Amazon Kindle, Audible and Cloud services; and beyond that, there are very few industries that this company hasn’t taken over. Despite its wide presence, Amazon hasn’t made a huge leap into real estate. Rather, most of the retail, data center, office space, warehouse, distribution and fulfillment centers required to run the huge business operations are generally rented.
You’re a huge tenant, not a huge property owner
According to the company’s 2019 annual report, Amazon rented just over 318 million square feet, which is 95% of its real estate activity, and owned just 15 million square feet, which is just 5% of its total portfolio. A recent development by SunCap Property Group for a 278,000-square-foot distribution center in Pittsburgh, Pennsylvania supposedly being built for Amazon has made investors wonder whether Amazon will become a real estate company.
As of the third quarter of 2020, Amazon spent $ 48.5 million on long-term lease liabilities. Reducing lease obligations by owning real estate will undoubtedly open the door to increasing revenue while at the same time having access to additional tax benefits and the ability to sell the asset or lease the space in the future if necessary or but not without compromises. Warehouse fatigue is already a battle that Amazon is waging. The ability to rent existing space or partner with established real estate investment trusts (REITs) to rent, develop, or redevelop space to meet the company’s needs seems like a more attractive long-term option. Simon Property Group Inc. (NYSE: SPG) recently started talks with Amazon about converting unused retail space in its malls into distribution centers that could add tens of thousands to hundreds of thousands of square feet to Amazon’s footprint over the next several years.
The final result
Amazon focuses on continuous growth in the most cost effective and efficient way possible. Using existing space near major subways reduces delivery time and costs, and renting this space is in most cases less expensive than buying and developing the property alone. There will be a few instances when a major development like the Pittsburgh property will make sense. Overall, I doubt that owning real estate will become a major focus of the company, and I also don’t think own real estate portfolio will ever outweigh the rented space.