Amazon Becoming a Giant REIT?
Board: Free For All Economics
I posted this to the paid SA Amazon board and repost it here:
First the obvious: Most of the investments Amazon has made in the last couple of years has been to build more warehouses to get closer to population centers and its customers. of course, having more warehouses in more states means that they are collecting and paying sales taxes in more and more states, but the benefits of being able to deliver most orders within one or 2 days while shipping with ground transportation or using cheaper local delivery guys provides Amazon with not only more customer satisfaction on delivery speed, but also saves them tons of money on shipping costs as we just witnessed in their earnings report that shipping cost as a percentage of sales went down. And that is what the Wall Street big shots and analysts see.
But that is not the whole story and there is more than meets the eye in all these gigantic investments that Amazon is making in acquiring land close to major cities and building their giant million square foot plus warehouses. With all their gigantic warehouses that they own, Amazon has really become a mega monster 800 pound gorilla of the real estate industry. Amazon now owns more than 80 such warehouses and some of them and almost all the new ones are over 1 million square feet each. See this:
Amazon now owns a warehouse footprint of almost 80 million square feet and growing fast. By comparison, one of the world's largest commercial shopping center landlords, DDR (publicly traded on NYSE as DDR), owns about 116 million square feet of shopping center property.
Here is the kicker that the analysts don't see: Amazon is collecting gigantic amounts of rent from 3rd party merchants that use their FBA warehouses to fulfill their merchandise. Sellers like us are shipping ever increasing amount of merchandise to all these Amazon warehouses and we all pay warehousing fees that are orders of magnitude higher than the cost of paying rent to our own landlord to store the same merchandise in our own warehouses. In other words, in effect, 3rd party merchants are bearing the cost of all these warehouses and then some and although Amazon does not release specific numbers in this regard, it is easy to make an educated guess. Here are some figures to consider:
1- Amazon's warehouses are outside of cities where a typical warehouse rent should not be more than $0.50 per square foot per month for the size of the warehouses they own. Collecting a $0.5 per square foot in rent per month (or $6/SF/Year) should cover the cost of ownership of the real estate (interest & principal, taxes, insurance) and even make them a nice hefty profit as a landlord. In comparison consider that we only pay a monthly rent/sf/month of less than $0.45 for our small 12,000 square foot warehouse in the busy suburbs of north Atlanta where real estate is quite expensive. And don't forget to factor in the preferential tax treatments Amazon gets from localities where they build their giant warehouses. See Loopnet.com below for examples of large warehouses for rent:
2- Amazon collects from us, the 3rd party merchants, a rent per square foot of merchandise that are stored in its warehouses that is almost $2.25/SF/month, or $27/SF/year. That is more than the annual rent we pay DDR in a nice shopping center in Atlanta where I also own a shop. Here is Amazon's page on FBA Warehouses storage fees that merchants pay:
From above, $0.45 per cubic feet per month for 1st 9 months of the year and then $0.60 per cubic feet per month for the last quarter. The maximum pallet size that we can ship to Amazon is a standard skid that is 48"x 40"x 60"H, or 66.7 cubic feet and we pay $30 per month for storing that pallet of merchandise for 1st 9 months and then $40 per month for the last quarter. That is more than $2.25/SF/Month for 9 months and more the last quarter, giving an average monthly rent of $29.25 for the footprint of a standard pallet that occupies 13.32 square feet of space. Of course, that is also assuming that Amazon does not store merchandise higher than 6 feet and if they do, which I am sure they do, they make even more money from storage fees charged to merchants. Also, you have to account for the fact that not all of the warehouse space is jam packed with merchandise and there are some dead space for forklifts, robots, people, isles, offices, etc. But the images of Amazon's warehouses clearly show that they use every inch of usable storage space.
So, for those of you who are baffled every time an Amazon earnings report comes out and they apparently miss on all metrics yet the stock shoots up, you are not hearing or reading the whole story. Never mind the infrastructure costs of building those giant warehouses. Merchants like us are paying for them and Amazon is becoming a giant REIT in the process of dominating the retail world.