At the core of Amazon's (NASDAQ: AMZN) success is its ability to ship out goods efficiently and cost-effectively. This distinction has helped set it apart from other online retailers. But if there's one area that's a challenge to ship to even for Amazon, it's New York City.
New York City is notoriously jam-packed, and its streets offer little room for delivery vehicles. Warehouse space is also extremely limited in the city, making it harder to fulfill orders quickly for certain ZIP codes. It's for this reason that Amazon has been steadily seeking to expand its warehousing resources in New York City and the surrounding area. But what does that mean for real estate investors?
Scooping up warehouse space
Digital orders have exploded in the wake of the coronavirus pandemic, with many consumers shifting to online shopping to avoid potential exposure to COVID-19 in stores. Not surprisingly, Amazon struggled to keep up back in March and April 2020 and has since been trying to snag additional warehouse space to avoid a repeat scenario.
To date, the online retail giant has amassed at least 12 warehouses spread out across New York City's five boroughs, one of which is a massive 1 million-plus square-foot space. Amazon has also added over two dozen warehouses to its portfolio in the suburbs surrounding New York City.
Amazon's goal is to expedite shipping to an area that's been historically hard to reach and service. New York City only has about 128 million square feet of industrial space, which is less than many smaller U.S. cities. Many packages that arrive in New York City originate from New Jersey and Pennsylvania, where warehouse space is cheaper and there's ample room for distribution centers. But the closer Amazon can get to the city itself, the better. Having warehouses within New York City limits could save the company about 20% on delivery expenses compared to deliveries that come from nearby New Jersey, right across the river.
Amazon's been under fire in New York
It's easy to argue Amazon has done a bang-up job of snagging warehouse space in a market where it's so limited. But Amazon has also gotten itself into trouble in the course of managing -- or mismanaging -- New York City distribution centers.
Recently, New York Attorney General Letitia James initiated charges against Amazon for its failure to keep warehouse workers safe during the pandemic. Specifically, the online giant was blasted for failing to create an environment that supported social distancing and not maintaining sanitary conditions. As of last fall, nearly 20,000 U.S. Amazon employees had tested positive, or had been presumed positive, for COVID-19.
Will industrial REITs get a boost?
Amazon's warehouse expansion is good news for industrial REITs (real estate investment trusts) in theory, but it could also be a mixed bag. Given Amazon's high-profile nature and dubious recent history, if the online giant continues scooping up warehouse space, it could lead local lawmakers to seek to enforce stricter regulations -- which could make warehouses more expensive to operate across the board.
Furthermore, if Amazon establishes a strong presence in New York City itself, it could take business away from local stores and retailers, thereby leading to closures. Granted, Amazon is already a major threat in this regard, but if its shipping times improve in New York City, it could solidify that advantage and drive local businesses into the ground, hurting commercial landlords and sending property values downward.
As such, while it's natural to, on the one hand, root for Amazon to keep expanding its warehouse territory, investors certainly can't ignore the flip side.