Supply Overload

The explosion of online shopping during the pandemic spurred the growth of warehouses across the US. Amazon (AMZN) nearly doubled its warehouse capacity in two years. But now, as shoppers return to the malls, the trend has slowed — making these facilities a drain on profits.

In recent months Amazon acknowledged that it overexpanded, adding it’s been working to reverse that strategy. It has already shrunk its portfolio of delivery hubs in a move that will save on labor costs.

Warehouse REITs

Last year, Amazon accounted for 15% of net absorption in terms of industrial buildings’ leased space. Amid falling demand, warehouse stock’s share prices have declined. Prologis (PLD), a real estate investment trust specializing in warehouses, has seen its valuation slashed nearly 25% this year. Its UK counterpart Segro (SEGXF) has experienced similar declines.

Still, some market observers see opportunities for investors in the space given high occupancy rates. Retailers also want a place to store products to offset any potential supply chain-driven shortages.

In Your Neighborhood

There may also be a strategic shift to move warehouses closer to where people live. Shipping has become increasingly expensive due to the escalation in fuel and other costs. Expenses related to transportation can reach upwards of 70% of logistical spending. The cost to maintain a facility near a population center can be a fraction of this amount.

Consumers may begin to see warehouses being built close by or empty office spaces being converted. That could potentially result in faster deliveries at a lower cost.

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