January 28, 2020
by Jeremy Jensen

I found this article to be quite interesting in regards to the “Amazon affect” on industrial and the shifting e-commerce demands placed on warehouses across the country. Hope you enjoy it as well.

“The key trade that we make is that we trade real estate for technology. Real estate is the key cost of physical retailers. That’s why there’s the old saw: location, location, location. Real estate gets more expensive every year, and technology gets cheaper every year.”
– Jeff Bezos, March 26, 2001, perhaps not anticipating how big a lessee his would become


We like holiday-shortened weeks. And not just for the extra day of rest. Really light data weeks like last week give us an opportunity to explore other ideas.

We were inspired by this piece on Amazon leasing activity by Adrian Ponsen, CoStar’s director of market analytics for Philadelphia. Go click that link and read it. It is a wonderful piece of reporting.

In it, Adrian notes how dominant a force Amazon has been in the industrial market over the last several years at the national level. “But in the Philadelphia area, and its surrounding major industrial markets,” he says, “Amazon’s new leasing has been running counter to the national trend, declining by more than 70% compared to peak levels reached in 2017.”

That is a shocking statistic. And it made us wonder: what is the national trend?

The chart below shows square footage of leases signed by Amazon across the four U.S. regions. Shoutout to CoStar Senior Market Analyst Rafael De Anda for help with the following charts.

We’ve done quite a bit of analysis on how the regions across the U.S. have diverging trends in things like jobs and housing starts, with the South and West growing much faster than the Northeast and Midwest. It appears the same divergence is showing up in Amazon leasing activity.

The West and South stand far above leasing activity in the Northeast and Midwest since mid-2018, a significant shift after moving mostly in lockstep from 2013 to 2017.

In previous pieces we’ve posited that the regional divergence trend was driven by demographics, population density, cost of living, and other factors. Is it really the same story with Amazon leasing?

Well, yes and no. Of course, stronger population and job growth in the South and West means that Amazon has to build out more infrastructure in those regions.

But we think Adrian teased out a more interesting trend that is occurring: “In the eastern Mid-Atlantic at least, Amazon is now more focused on opening smaller sorting centers that group orders based on their final destination, and last-mile delivery facilities, all of which are typically under 300,000 square feet and housed in older, more traditional industrial buildings.”

The earlier chart showed leasing activity in total square feet. If Amazon has started shifting its leasing activity in the more densely populated areas of the country to smaller properties, we would expect square footage of leases to drop significantly but the number of leases signed to show a different trend.

While still somewhat lower than the South and West, the chart above shows a much stronger leasing trend in the Northeast and Midwest. And this seems to suggest the Adrian Amazon Hypothesis is correct, that the company has shifted its focus to smaller facilities in the Northeast and Midwest while still leasing monster distribution facilities elsewhere.

In this vein, Amazon announced recent major expansions just outside non-HQ2 winners Austin and Atlanta. Oklahoma got its first fulfillment center in an enormous 2.6 million-square foot built-to-suit warehouse finished in August. Another Oklahoma facility is planned for Tulsa, reported to be a similar size and will be built on an 82-acre site.

As one of your authors quipped to the other, “they don’t have 82-acre properties just sitting outside of NYC and Boston.”

But it’s not only major metropolitan areas seeing Amazon activity. Deltona, Florida, a city of less than 100,000 in population but conveniently located between Orlando and Daytona Beach, was picked for Florida’s fifth Amazon distribution center.

As far as the West goes, it’s all California, where Bezos & Co signed leases in 18 different cities in 2019.

The top three states in the chart above are in the West or the South, but the next three are Massachusetts, Illinois and New Jersey. The Northeast and Midwest regions are well represented here, even if the nature of that leasing activity is skewing smaller and towards that proverbial last mile.

The Week Ahead…

This past week may have been devoid of any interesting macro data, but one shouldn’t take their eye off the ball for long. Next week features the first Federal Open Market Committee meeting of 2020, and just because members said they won’t change rates doesn’t mean it won’t move markets. To step back and look at how well the Fed is making progress towards its goals, we concocted the Fed Dashboard. It includes eight indicators that track the things the committee cares about and cites most frequently. Think of it as the Fed’s annual job review: in green we marked the areas the economy is doing better, with more room to potentially raise rates, while in red those areas the economy is struggling, creating condition that would suggest rate cuts.

The report card is mixed, but the poor areas stand out: even with unemployment at a generational low, the economy is failing to hit the Fed’s inflation target. Over the decade of the 2010s (according to some ), the Fed was within 10 basis points of its 2% inflation target for only 13 of the 120 months. Given the worsening wage growth data glaring red on the dashboard, there seems to be no risk of the Fed exceeding or even meeting its 2% inflation target any time soon.

This recurrent failure is staring current Fed members in the face as they undergo their periodic strategy review. This assessment of strategy, tools, and communication was begun late 2018, with findings and any changes to be announced in the first half of 2020.

The item most discussed as ripe for change is the committee’s inflation target. Not only have members missed their goal consistently, but it seems that lower inflation has been filtering into consumer expectations: see the corresponding line in our table. If the Fed aims to shore up its commitment to meeting its inflation target, expect it to begin communicating that soon, even as early as next week.

Beyond the Fed meeting, we receive the first estimate of 2019’s fourth quarter gross domestic product on Friday. This is projected to print around 2%, but with more noise than signal. Net exports will be responsible for about half of that growth, but only due to falling imports – not exactly something to celebrate.

CoStar Economy is produced weekly by Robert Calhoun, managing director and senior economist, and Matt Powers, associate director of CoStar Market Analytics in New York City.