Industrial Debrief: Amazon CapEx Explodes

Market Trends: Takeaways from 2Q2020 Industrial Earnings

Fred Krom
November 18, 2020
DATA & INDUSTRIAL STOCKS OUTPERFORM BY 50 PERCENTAGE POINTS

Public REIT stocks have yet to rebound significantly from the nadir reached in March. So far, the FTSE Nareit US Real Estate Index, which is made up of 200+ companies, has recouped less than two-thirds of its losses, while the S&P 500 and even junk bonds have fully recovered. Not surprisingly, sectors most affected by second wave uncertainty and extended work from home policies (namely, hotel, retail, and office) have only recovered one-third of COVID related declines. Hotel is the laggard down nearly 50% YTD, while industrial and data centers lead up 9% and 26%, respectively.

Source: FTSETM, Nareit®
Source: FTSETM, Nareit®
AMAZON ABSORPTION DOUBLES YEAR-OVER-YEAR IN 2Q

While e-Commerce leasing normalized from 40%+ of new leases in March to about 25% in 2Q, Amazon’s insatiable appetite for warehouse space continued into July, with DRE estimating that it was responsible for 25% of market activity. Amazon capex hit $6.6 billion in 2Q (+154% yoy) bringing its 1H20 outlay to $12 billion, inline with full year 2019. On a trailing 12 month basis, Amazon capex is $19 billion, up 75% yoy. STAG said Amazon absorbed 1.5+ MSF weekly (and possibly even daily at peak demand) in 2Q, a pace it did not believe was sustainable.

Source: Amazon 10-Q Filing
ACCELERATING GROCERY & MEDICAL DEMAND DRIVE 2Q STRENGTH

2Q results and forward guidance were better than feared, led by stronger market fundamentals, leasing demand, and rent collections. Tenant financial stress and rising vacancies budgeted for in April did not play out, with industry rent collections at 95%+ in July, in-line with to above pre COVID levels. According to REXR, the overwhelming majority (80%+) of tenants who received PPP money did not seek rent relief.

Source: DRE, EGP, FR, PLD, REXR, STAG
SPEC DEVELOPMENT TO RESUME IN 2H20

While spec development ground to a halt in 2Q due to COVID, capital deployment improved materially from the nadir in April, with PLD increasing its full year 2020 starts guidance by 50%+. PLD will spend $100 million on new spec development in 2H20, while FR said spec development has been and will continue to be the engine of growth for the company. DRE may resume spec development on strategic infill land sites in SoCal, South Florida, NorCal, and Seattle.

Source: Prologis 10-Q Filing
LOCAL TENANTS & SMALL SPACES SUFFER MOST

Despite Amazon doubling its capacity to satisfy accelerating e-Commerce adoption and the unprecedented fiscal and monetary stimulus injected into the economy, industrial completions outpaced net absorption by 30+ MSF in 2Q. National tenants and big bulk space outpaced local and small box, with the vast majority of rent deferral requests from occupiers of less than 100k SF. PLD now expects net absorption of 160 MSF, up 60% from their April forecast, though still down 40% yoy.

LAND SCARCITY TO SUPPORT 2H20 RENT GROWTH

US vacancy ticked up slightly to 5.5% in 2Q; however, availability of well located, Class A space in Tier 1 (namely IE and NJ) and increasingly Tier 2 markets remains limited, which the REITs believe will fuel rent growth in 2H20. Remote work flexibility and higher taxes in 2021 (regardless of November’s victor with the national debt approaching $30 trillion) will drive faster job and people outmigration from CA, NY, and IL, disproportionally benefitting the Sunbelt. In 2Q, Austin, Dallas, Charlotte, and Tampa were notable outperformers, while Vegas and Orlando lagged on soft tourist travel.

Source: The Ports of Long Beach/LA, NY/NJ, Savannah, Seattle/Tacoma, Virginia, Charleston.
ONLINE GROCERY ADOPTION GROWS 4-5X THIS SUMMER

COVID forced households to stock their pantries by browsing online rather than store aisles, which benefitting drove increased demand for temperature-controlled infrastructure, with DRE noting that online grocery customers expanded from 13 million in 2019 to 45 million in 2Q. COLD, which saw an expected decline sequentially in retail demand post the stockpiling surge in March, said that demand remains above pre pandemic levels.

ACQUISITIONS LIMITED TO INFILL WEST COAST ASSETS

Not surprisingly, acquisition activity was light with the top 5 REITs spending $117 million in 2Q, down from $925 million in 2Q19. Activity was heavily concentrated in high barrier markets throughout California with initial yields ranging from 4.6% to 5.5%. REXR acquired 3 additional assets in July for $69 million and has $50+ million new deals under LOI or contract. PLD and DRE increased their full year acquisitions guidance (midpoint) from $450 to $550 million and $50 to $150 million, respectively.

TENANT RELIEF & ASSET NEGLECT AFFORD VALUE ADD OPPORTUNITY

Few signs of distress anywhere (yet) in the industrial market, though REXR sees a big opportunity to buy value added warehouses from family owned portfolios that have neglected legacy assets for decades and who now face rising tenant relief requests. PLD believes that low rates, accommodative fiscal and monetary policy, accelerating e-Commerce demand, and secular headwinds plaguing the retail, hotel, and office sectors, will drive more industrial sector cap rate compression into 2021. REXR said it “will not be unusual to see deals start to transact sub 4%”.

CONSTRUCTION PRICES DROP ACROSS THE BOARD (FOR NOW)

Several REITs said that building out their land bank was the “best use of capital” at this juncture, due partly to the long term secular tailwinds of e-Commerce and to the uncertain construction outlook across retail, office, and hospitality, which has already led to lower materials and labor costs. In fact, EGP called out the benefit to project level returns from starting new development and mentioned that it has seen building shell costs reduced by $1 to $2 PSF.

Industrial Debrief: Amazon CapEx Explodes

Market Trends: Takeaways from 2Q2020 Industrial Earnings

Fred Krom
November 18, 2020
|
Industrial
DATA & INDUSTRIAL STOCKS OUTPERFORM BY 50 PERCENTAGE POINTS

Public REIT stocks have yet to rebound significantly from the nadir reached in March. So far, the FTSE Nareit US Real Estate Index, which is made up of 200+ companies, has recouped less than two-thirds of its losses, while the S&P 500 and even junk bonds have fully recovered. Not surprisingly, sectors most affected by second wave uncertainty and extended work from home policies (namely, hotel, retail, and office) have only recovered one-third of COVID related declines. Hotel is the laggard down nearly 50% YTD, while industrial and data centers lead up 9% and 26%, respectively.

Source: FTSETM, Nareit®
Source: FTSETM, Nareit®
AMAZON ABSORPTION DOUBLES YEAR-OVER-YEAR IN 2Q

While e-Commerce leasing normalized from 40%+ of new leases in March to about 25% in 2Q, Amazon’s insatiable appetite for warehouse space continued into July, with DRE estimating that it was responsible for 25% of market activity. Amazon capex hit $6.6 billion in 2Q (+154% yoy) bringing its 1H20 outlay to $12 billion, inline with full year 2019. On a trailing 12 month basis, Amazon capex is $19 billion, up 75% yoy. STAG said Amazon absorbed 1.5+ MSF weekly (and possibly even daily at peak demand) in 2Q, a pace it did not believe was sustainable.

Source: Amazon 10-Q Filing
ACCELERATING GROCERY & MEDICAL DEMAND DRIVE 2Q STRENGTH

2Q results and forward guidance were better than feared, led by stronger market fundamentals, leasing demand, and rent collections. Tenant financial stress and rising vacancies budgeted for in April did not play out, with industry rent collections at 95%+ in July, in-line with to above pre COVID levels. According to REXR, the overwhelming majority (80%+) of tenants who received PPP money did not seek rent relief.

Source: DRE, EGP, FR, PLD, REXR, STAG
SPEC DEVELOPMENT TO RESUME IN 2H20

While spec development ground to a halt in 2Q due to COVID, capital deployment improved materially from the nadir in April, with PLD increasing its full year 2020 starts guidance by 50%+. PLD will spend $100 million on new spec development in 2H20, while FR said spec development has been and will continue to be the engine of growth for the company. DRE may resume spec development on strategic infill land sites in SoCal, South Florida, NorCal, and Seattle.

Source: Prologis 10-Q Filing
LOCAL TENANTS & SMALL SPACES SUFFER MOST

Despite Amazon doubling its capacity to satisfy accelerating e-Commerce adoption and the unprecedented fiscal and monetary stimulus injected into the economy, industrial completions outpaced net absorption by 30+ MSF in 2Q. National tenants and big bulk space outpaced local and small box, with the vast majority of rent deferral requests from occupiers of less than 100k SF. PLD now expects net absorption of 160 MSF, up 60% from their April forecast, though still down 40% yoy.

LAND SCARCITY TO SUPPORT 2H20 RENT GROWTH

US vacancy ticked up slightly to 5.5% in 2Q; however, availability of well located, Class A space in Tier 1 (namely IE and NJ) and increasingly Tier 2 markets remains limited, which the REITs believe will fuel rent growth in 2H20. Remote work flexibility and higher taxes in 2021 (regardless of November’s victor with the national debt approaching $30 trillion) will drive faster job and people outmigration from CA, NY, and IL, disproportionally benefitting the Sunbelt. In 2Q, Austin, Dallas, Charlotte, and Tampa were notable outperformers, while Vegas and Orlando lagged on soft tourist travel.

Source: The Ports of Long Beach/LA, NY/NJ, Savannah, Seattle/Tacoma, Virginia, Charleston.
ONLINE GROCERY ADOPTION GROWS 4-5X THIS SUMMER

COVID forced households to stock their pantries by browsing online rather than store aisles, which benefitting drove increased demand for temperature-controlled infrastructure, with DRE noting that online grocery customers expanded from 13 million in 2019 to 45 million in 2Q. COLD, which saw an expected decline sequentially in retail demand post the stockpiling surge in March, said that demand remains above pre pandemic levels.

ACQUISITIONS LIMITED TO INFILL WEST COAST ASSETS

Not surprisingly, acquisition activity was light with the top 5 REITs spending $117 million in 2Q, down from $925 million in 2Q19. Activity was heavily concentrated in high barrier markets throughout California with initial yields ranging from 4.6% to 5.5%. REXR acquired 3 additional assets in July for $69 million and has $50+ million new deals under LOI or contract. PLD and DRE increased their full year acquisitions guidance (midpoint) from $450 to $550 million and $50 to $150 million, respectively.

TENANT RELIEF & ASSET NEGLECT AFFORD VALUE ADD OPPORTUNITY

Few signs of distress anywhere (yet) in the industrial market, though REXR sees a big opportunity to buy value added warehouses from family owned portfolios that have neglected legacy assets for decades and who now face rising tenant relief requests. PLD believes that low rates, accommodative fiscal and monetary policy, accelerating e-Commerce demand, and secular headwinds plaguing the retail, hotel, and office sectors, will drive more industrial sector cap rate compression into 2021. REXR said it “will not be unusual to see deals start to transact sub 4%”.

CONSTRUCTION PRICES DROP ACROSS THE BOARD (FOR NOW)

Several REITs said that building out their land bank was the “best use of capital” at this juncture, due partly to the long term secular tailwinds of e-Commerce and to the uncertain construction outlook across retail, office, and hospitality, which has already led to lower materials and labor costs. In fact, EGP called out the benefit to project level returns from starting new development and mentioned that it has seen building shell costs reduced by $1 to $2 PSF.

Industrial Debrief: Amazon CapEx Explodes

Market Trends: Takeaways from 2Q2020 Industrial Earnings

Fred Krom
November 18, 2020
|
Industrial
DATA & INDUSTRIAL STOCKS OUTPERFORM BY 50 PERCENTAGE POINTS

Public REIT stocks have yet to rebound significantly from the nadir reached in March. So far, the FTSE Nareit US Real Estate Index, which is made up of 200+ companies, has recouped less than two-thirds of its losses, while the S&P 500 and even junk bonds have fully recovered. Not surprisingly, sectors most affected by second wave uncertainty and extended work from home policies (namely, hotel, retail, and office) have only recovered one-third of COVID related declines. Hotel is the laggard down nearly 50% YTD, while industrial and data centers lead up 9% and 26%, respectively.

Source: FTSETM, Nareit®
Source: FTSETM, Nareit®
AMAZON ABSORPTION DOUBLES YEAR-OVER-YEAR IN 2Q

While e-Commerce leasing normalized from 40%+ of new leases in March to about 25% in 2Q, Amazon’s insatiable appetite for warehouse space continued into July, with DRE estimating that it was responsible for 25% of market activity. Amazon capex hit $6.6 billion in 2Q (+154% yoy) bringing its 1H20 outlay to $12 billion, inline with full year 2019. On a trailing 12 month basis, Amazon capex is $19 billion, up 75% yoy. STAG said Amazon absorbed 1.5+ MSF weekly (and possibly even daily at peak demand) in 2Q, a pace it did not believe was sustainable.

Source: Amazon 10-Q Filing
ACCELERATING GROCERY & MEDICAL DEMAND DRIVE 2Q STRENGTH

2Q results and forward guidance were better than feared, led by stronger market fundamentals, leasing demand, and rent collections. Tenant financial stress and rising vacancies budgeted for in April did not play out, with industry rent collections at 95%+ in July, in-line with to above pre COVID levels. According to REXR, the overwhelming majority (80%+) of tenants who received PPP money did not seek rent relief.

Source: DRE, EGP, FR, PLD, REXR, STAG
SPEC DEVELOPMENT TO RESUME IN 2H20

While spec development ground to a halt in 2Q due to COVID, capital deployment improved materially from the nadir in April, with PLD increasing its full year 2020 starts guidance by 50%+. PLD will spend $100 million on new spec development in 2H20, while FR said spec development has been and will continue to be the engine of growth for the company. DRE may resume spec development on strategic infill land sites in SoCal, South Florida, NorCal, and Seattle.

Source: Prologis 10-Q Filing
LOCAL TENANTS & SMALL SPACES SUFFER MOST

Despite Amazon doubling its capacity to satisfy accelerating e-Commerce adoption and the unprecedented fiscal and monetary stimulus injected into the economy, industrial completions outpaced net absorption by 30+ MSF in 2Q. National tenants and big bulk space outpaced local and small box, with the vast majority of rent deferral requests from occupiers of less than 100k SF. PLD now expects net absorption of 160 MSF, up 60% from their April forecast, though still down 40% yoy.

LAND SCARCITY TO SUPPORT 2H20 RENT GROWTH

US vacancy ticked up slightly to 5.5% in 2Q; however, availability of well located, Class A space in Tier 1 (namely IE and NJ) and increasingly Tier 2 markets remains limited, which the REITs believe will fuel rent growth in 2H20. Remote work flexibility and higher taxes in 2021 (regardless of November’s victor with the national debt approaching $30 trillion) will drive faster job and people outmigration from CA, NY, and IL, disproportionally benefitting the Sunbelt. In 2Q, Austin, Dallas, Charlotte, and Tampa were notable outperformers, while Vegas and Orlando lagged on soft tourist travel.

Source: The Ports of Long Beach/LA, NY/NJ, Savannah, Seattle/Tacoma, Virginia, Charleston.
ONLINE GROCERY ADOPTION GROWS 4-5X THIS SUMMER

COVID forced households to stock their pantries by browsing online rather than store aisles, which benefitting drove increased demand for temperature-controlled infrastructure, with DRE noting that online grocery customers expanded from 13 million in 2019 to 45 million in 2Q. COLD, which saw an expected decline sequentially in retail demand post the stockpiling surge in March, said that demand remains above pre pandemic levels.

ACQUISITIONS LIMITED TO INFILL WEST COAST ASSETS

Not surprisingly, acquisition activity was light with the top 5 REITs spending $117 million in 2Q, down from $925 million in 2Q19. Activity was heavily concentrated in high barrier markets throughout California with initial yields ranging from 4.6% to 5.5%. REXR acquired 3 additional assets in July for $69 million and has $50+ million new deals under LOI or contract. PLD and DRE increased their full year acquisitions guidance (midpoint) from $450 to $550 million and $50 to $150 million, respectively.

TENANT RELIEF & ASSET NEGLECT AFFORD VALUE ADD OPPORTUNITY

Few signs of distress anywhere (yet) in the industrial market, though REXR sees a big opportunity to buy value added warehouses from family owned portfolios that have neglected legacy assets for decades and who now face rising tenant relief requests. PLD believes that low rates, accommodative fiscal and monetary policy, accelerating e-Commerce demand, and secular headwinds plaguing the retail, hotel, and office sectors, will drive more industrial sector cap rate compression into 2021. REXR said it “will not be unusual to see deals start to transact sub 4%”.

CONSTRUCTION PRICES DROP ACROSS THE BOARD (FOR NOW)

Several REITs said that building out their land bank was the “best use of capital” at this juncture, due partly to the long term secular tailwinds of e-Commerce and to the uncertain construction outlook across retail, office, and hospitality, which has already led to lower materials and labor costs. In fact, EGP called out the benefit to project level returns from starting new development and mentioned that it has seen building shell costs reduced by $1 to $2 PSF.

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