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Amazon Builds Property Empire, Quietly Buying Land Across the US

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(Bloomberg)-just outside Round Rock, Texas, 193 acres were coveted by some of the largest developers in the United States. Located a few miles north of the booming city of Austin, the raw parcels can be used for virtually anything given the state’s generous land use. That’s why when the prominent Robinsons brought real estate to market last year, there was a lot of interest from a variety of realtors, including homebuilders, private equity giant Blackstone, and warehouse renter Prologis. It was sent. Country. However, it was not a real estate company when the winning bidder came out in October. This is Amazon.com Inc, the world’s largest e-commerce company.

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About three years ago, Seattle-based colossus began quietly searching for properties in major US markets such as Southern California, Texas, Illinois, Florida, and the Bay Area. Between 2020 and 2022, Amazon tripled the amount of industrial space it owns in North America, according to the company’s filings. Amazon may buy existing buildings such as abandoned call centers, but it also buys bare land, which acquired about 4,000 acres at the same time, said real estate researcher CoStar Group Inc. A new generation of towering fulfillment centers that can store a wide variety of products near customers in populated areas, according to people familiar with the strategy.

Buying land is a big change for Amazon, where a few developers have traditionally relied on finding real estate, building fairly simple warehouses, and renting them out to companies. Today, Amazon is increasingly participating in the development process in-house, often bidding for the best space for long-time partners.

This is a potentially dangerous strategy that exposes Amazon to fluctuations in the industrial real estate market. The company also has too much warehouse space now that it was overbuilt during the pandemic and the surge in online shopping slowed. As a result, Amazon is trying to sublease unnecessary space, delaying warehouse expansion. “As with all businesses, we are adapting to the availability of real estate and the location of customer demand, and we are constantly evaluating our approach based on our finances,” spokesman Kelly Nantel said in a statement. I am saying.

However, the company said there was no change in its long-term real estate strategy. Executives continue to work to secure land in the right places to realize founder Jeff Bezos’ vision of making satisfying online purchases as quickly as a trip to a store. .. If Amazon doesn’t stay close to its customers right now, it could permanently relinquish its proximity to retailers like Wal-Mart, which is just a short drive away.

John Blackledge, an analyst at Cohen and Company LLC, said: “People will buy more on Amazon when they find that they can buy in 5 hours instead of 2 days.”

According to CoStar, Amazon has spent at least $ 2.2 billion on the acquisition of land or real estate that is planned to be redeveloped in the last two years, and some states, including Texas, have not disclosed the purchase price, so estimates States to be modest.

In March 2020, the company invested $ 30 million on 63 acres of land in a busy industrial area between San Diego and the US-Mexico border. Next, we built a state-of-the-art facility with a height of 130 feet (40 meters). The facility can handle a variety of products for same-day shipping. Few people noticed that the transaction was a departure from standard practice, as the company opened new logistics facilities about once every 24 hours.

Amazon has historically preferred not to tie money to real estate. People said Bezos was eager to run the business for as long as possible like a startup, and he was always planning other cash plans. He liked investing in long-term bets that could potentially change. He is building cloud computing, Alexa’s voice-launching platform, and movie studios.

Bezos’ aversion to buying real estate has confused some Amazon real estate executives, especially as the company matures and its needs change. Retail competitors like Wal-Mart own most of their stores in the United States and value more management and assets. Real estate portfolios can be sold and leased back to help companies survive lean periods without giving up on land use. There was also concern that Amazon would leave money on the table when dealing with developers. When Amazon signs a long-term lease, the value of the property usually spikes. Even though the company has been paying rent for 20 years, it often has no benefit.

Amazon’s move to deliver deliveries to customers on the same day was an ideal moment to rethink Bezos’ strategy. The company needed industrial space near its low-land, highly competitive customers. Building a box in a vacant lot on the outskirts of the countryside no longer worked. Amazon needed to pack more products into smaller urban plots and build more specialized and expensive taller buildings. Industrial property rights behind big cities are increasingly scarce, and many players want it, from distributors such as United Parcel Service Inc. and FedEx Corporation to grocery stores, restaurant chains, and car dealerships. increase. Despite construction work supported by pandemic-related demand, industrial space vacancy rates are the lowest ever at 3.4%.

Buying land is dangerous. It’s even more so to develop it, as Amazon itself has to negotiate politics with local bureaucracy. But according to strategic savvy people, the new generation of fulfillment centers is orders of magnitude more complex than the 40-foot boxes currently scattered across the country, leaving executives with no choice. I feel it.

The new facility can be 100 feet or more in height, is equipped with state-of-the-art automation, and requires a large amount of power. Warehouse developers usually avoid expensive and professional projects, especially if the space in a 100-year-old brick warehouse can get a premium in the right place. Finding a new tenant in a simple warehouse is easy, but it’s much harder to re-lease a facility built specifically for Amazon’s rigorous specifications.

Building a new facility can cost twice as much as a regular warehouse, which currently costs about $ 200 per square foot. That’s why Amazon is appealing to a new class of investors to help fund expansion, as well as developers focused on building for profit. USAA Real Estate Co., Softbank Group Corp.’s Fortress Investment Group LLC, and GLP Capital Partners LP are one of the investment companies interested in funding Amazon’s expansion in transactions that are closer to corporate bonds than leasing contracts.

Unlike developers who are worried about whether a building will appeal to the next tenant, these investors focus on the creditworthiness of the borrower. According to Eric Frankel, Commercial Real Estate Consultant and Director at Validus Capital, real estate can protect profits from other investments from taxes and often accept lower returns than Amazon pays for about 20 years. “These new warehouses are very specialized and are like manufacturing facilities,” he said. “Therefore, Amazon needs to find a variety of funding partners.”

Amazon does not win every bid war. According to people familiar with the matter, the company lost its headquarters in Allstate, a suburb of Chicago, and a 100-acre lot near Miami to an industrial real estate company. However, Amazon is widespread enough to overturn long-standing relationships between deep-pocket rivals and companies that are suddenly competing for the best land. Amazon will continue to pay developers to oversee warehouse construction, but in the $ 5 million range compared to the $ 50 million profits gained from converting vacant lots to new facilities with Amazon as a tenant. For a small fee, a problem.

For developers, the new strategy makes dealings with Amazon more complicated. According to people familiar with the situation, many are hesitant to show the land of the company they want to acquire and lease it to an e-commerce giant. Deal with the company. When Amazon is considering other strategies, including the purchase and development of the parcel itself, those familiar with that strategy say the company suddenly gives up trading. Last year, Amazon withdrew dozens of proposed distribution centers, according to developers and brokers.

“People are angry,” said one real estate developer who was trading with Amazon and a recent deal failed. “They’re just cutting out their partners who helped them get to where they are.” The company denies that the relationship with the developers is getting worse, and the developers need Amazon. He said he needed them as partners as much as he did.

The question now is how Amazon adapts its boom-era strategy to the current economic situation. Online sales growth is slowing, interest rates are rising, and some analysts expect a recession in the coming months. People familiar with the matter say the company has already reduced the number of new high-rise warehouses it plans to build in the next few years from 40 to about 10. “Our plans are evolving and we can’t confirm future builds or launches,” said spokesman Nantel.

Executives are also discussing whether to unload some of the real estate that they don’t need right away, or keep it for the day when demand recovers again, people said. Those who prefer to keep all the properties say that securing the same space in the future is even more expensive and potentially impossible. How the debate is resolved is partly due to CEO Andy Jassy recently announcing that he will leave to run logistics startup Flexport. It depends on whether you choose to replace Dave Clark. Faster delivery when consumers are starting to withdraw.

The 193 acres of land that Amazon bought at Round Rock last fall captures potential promises and dangers. On the one hand, building a next-generation warehouse near Austin will allow the company to meet the needs of a fast-growing region over the next few years. On the other hand, if the recession becomes a reality and online sales growth continues to slow, Amazon can get stuck in expensive lands.

It seems that the company is already hedging bets. Amazon was planning to move quickly towards the construction of a new facility, host a community meeting to take over the local population, and begin the permit application process this summer. Then, on May 19, Amazon’s economic development manager told city officials that the company was holding the project indefinitely.

“As mentioned in a recent revenue report, customer demand patterns are stable, which provides an opportunity to better match our capabilities and demand,” Jessica Blow wrote in an email. .. “When the timeline for this site becomes clearer, we will reconnect with the city and neighboring communities.”

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