One of Amazon's (NASDAQ: AMZN) core strengths is its ability to ship out goods quickly and efficiently. And to do that, it needs an extensive network of warehouses and distribution centers. But finding that space can be challenging, so Amazon has been scooping up dying malls in an effort to expand its footprint and make the process of shipping goods even more efficient.
Converting malls to fulfillment centers
In the course of the coronavirus pandemic, online orders have surged, not just for Amazon, but retailers on a whole. And that means there's more competition than ever to snag warehousing space.
But Amazon doesn't just want more distribution centers -- it wants fulfillment centers that are centrally located. And malls easily meet that requirement. Malls can generally be found in convenient locations -- often off highways for easy consumer access. And so taking over sluggish malls makes sense for Amazon, especially at a time when digital sales have grown in popularity.
But Amazon's mall shopping spree wasn't fueled by the pandemic -- it was in effect well before it started. Between 2016 and 2019, Amazon converted about 25 shopping malls to warehouses, according to Coresight Research. And last year, it entered into talks with Simon Property Group (NYSE: SPG) to convert bankrupt department stores into fulfillment centers.
More recently, Amazon expanded its portfolio of malls-turned-warehouses. Last month, it won approval to convert a Baton Rouge, Louisiana, mall into a 3.4 million-square-foot distribution center. And back in December, it got the green light to turn Worcester, Massachusetts' Greendale Mall into a 121,000-square-foot distribution center.
A good use for malls
Though many malls were struggling before the coronavirus outbreak began, the pandemic hammered malls by taking much-needed revenue away from retailers, prompting many of them to shutter permanently or make plans to do so. In fact, it's estimated that around 50% of mall-based department stores could permanently close down by the end of 2021, according to Green Street.
Most of these store closures are expected to happen at lower-tier shopping centers that make less than $320 per square foot of space, which makes it hard to cover their mortgages, especially once vacancies come into the mix. But Amazon could bail some of these dying malls out.
In 2020, the online retail giant's net sales increased 37% compared to 2019, which means Amazon is more desperate than ever to expand its network of fulfillment centers. By taking over malls, it can continue to keep up with consumer demand -- and perhaps save itself money on shipping costs.
Centrally located warehouses may cost money to build and maintain, but they have the potential to save Amazon a huge chunk of cash on distribution expenses. As more retailers succumb to the impact of the pandemic or simply make the strategic decision to shutter locations and focus on digital sales, Amazon should have a key opportunity to continue turning to malls for warehouse space.
At the same time, real estate investors would be wise to look at industrial REITs (real estate investment trusts) for their portfolios. Amazon isn't the only retailer that needs more warehouse space, and there's a good chance demand will hold steady for many years to come.