Amazon’s landlord doubles down on vast ecommerce warehouses


During the first dotcom boom Hamid Moghadam, like many entrepreneurs, was taken by the idea that the internet would one day revolutionise the way people shop.

Moghadam, then a property investor, sold the big chunk of his portfolio that was devoted to shopping centres and poured the cash into warehouses and a $5m stake in Webvan, the pioneering online grocer.

Webvan went bust soon after. But those warehouses were the germ of what is today one of the world’s largest property companies. The almost 1bn sq ft of warehouses in 19 countries controlled by Prologis, Moghadam’s real estate investment trust, are the essential nodes of electronic commerce and home to tenants including Amazon, Walmart and Home Depot, among others.

“We actually haven’t had a new idea since 1999,” Moghadam, 64, quipped about Prologis’s ascent.

If the warehouse was once derided in the property world as “four walls and a roof” it has become a sensation over the past year as the Covid pandemic has unleashed a surge in online shopping, and a corresponding demand for facilities to handle all those goods.

Column chart of Net income, rolling 4-quarters ($bn) showing Prologis profits

As a share of overall retail sales, ecommerce jumped from about 15 per cent before the pandemic to about 25 per cent soon after. The boost to Prologis’s business was even greater since warehouses used for ecommerce require more square footage than traditional ones to handle product returns and other space-hungry chores.

As Covid-era clouds hang over office towers, shopping malls, business hotels and other real estate categories, investors are clamouring to put money into warehouses. Blackstone, the private equity group, has bought $100bn of warehouses, with Jonathan Gray, its president, recently identifying ecommerce as the “number one theme at the firm”.

“It is very, very good to be an industrial owner,” said Vince Tibone, an analyst at Green Street, a property research company, using the industry term for warehouses and logistics assets. “Ecommerce is the huge tailwind at the sector’s back.”

Moghadam did not expect the pandemic to play out this way. After the 2008 financial crisis, some of the companies that owned warehouses were highly levered and ran into trouble.

“Our initial reaction was that this is going to be really terrible, and we actually slowed down some of our development . . . sort of buttoned up the hatches,” he said. Instead, he discovered that the growth in ecommerce that he had been forecasting over the next five to 10 years happened in a matter of months. 

Column chart of Owned and managed leaseable area (m sq ft) showing Prologis has ramped up its warehouse space

Ecommerce as a share of retail sales may dip briefly, Moghadam predicted, as the pandemic eases in the US and Europe, and people are no longer homebound. But he is convinced the sector’s growth will then resume and accelerate.

“A whole generation of people that were not consumers of ecommerce — older people — have now seen the convenience and the magic . . . and are not going to go back,” he said. Moghadam also believes companies are beginning to reverse a decades-long trend of shrinking their inventories.

“All those supply chains that were really tweaked and optimised for efficiency all of a sudden fall apart when there’s . . . unanticipated disruption of any kind. And that’s why you’re running into all these shortages,” he said.

“For a company to lose sales because they don’t have a good that they can sell to their customer — that more than offsets [the] savings in carrying less inventory.” 

Moghadam’s own background is a poignant reminder that things can change — dramatically. When he was 16, his father, a residential property developer in Tehran, died. Moghadam left to study at the Massachusetts Institute of Technology, where he earned two engineering degrees. He went on to Stanford Business School, with plans to return home and take over the family business. Then came the Iranian revolution. Moghadam remained in the US but struggled to find work. 

An Amazon fulfillment centre in Tracy, California. Prologis counts the giant among its many tenants
An Amazon fulfilment centre in Tracy, California. Prologis counts the giant among its many tenants © Justin Sullivan/Getty

“It was 1980, it was also 14 per cent inflation, and oh yes, by the way, they grabbed the American hostages in Iran and it was on TV every night,” he said, adding: “I never get too secure in anything, and whenever things are going really well, I sort of start getting impatient and thinking about what can go wrong.”

On a recent morning, a sprawling and squeaky clean Prologis warehouse in Elizabeth, New Jersey showed how such facilities have evolved over the decades — from static buildings where workers occasionally sourced an item to dynamic ones where goods are constantly flowing in and out.

The 645,000-square foot facility is operated by Fedway Associates, a liquor distributor that delivers up to 47,500 cases per day, each with its own mix and match of bottles — many ordered the day before. They zoom over five miles of conveyor belts and are then deposited on trucks in just the right order to match a computer-generated delivery route.

What drew Fedway to the site? It is wedged between one of the busiest US seaports, an international airport and the Jersey Turnpike. Strangely, though, Fedway was most attracted by the parking. “If you ask an industrial user what is the number one critical demand that people have when they look at space? Parking,” said Robb Sansone, the Fedway’s chief financial officer. That is because as companies make evermore “last mile” deliveries, they require more vans — and space to park and load them.

With so much money now chasing warehouses, Prologis is facing more competition from Blackstone and others for a dwindling supply of suitable land, especially in built-up markets like New Jersey and Los Angeles. The good news is that the shortage has supported strong rents. Green Street is predicting record 8 per cent rent growth for US warehouses next year.

Line chart of Share prices and index rebased showing Prologis's stock surges on growing switch to online retail

But land prices are going up, and companies are demanding ever-larger facilities. Some developers have taken to converting fading shopping malls into warehouses. These have the benefit of being in the middle of population centres, making it easier to reach customers. But it turns out that residents do not want trucks rumbling through their towns, and retailers do not want neighbouring stores to become warehouses.

“We’ve probably looked at a thousand opportunities, and we’re doing, like, three or four. There are a few but they’re very hard to do,” Moghadam said.

So companies are trying to squeeze new life out of older facilities that may lack size and modern amenities, but which are well situated in places like the Bronx. Moghadam said that these buildings had been written off but were now “really great warehouses by virtue of their location.” 

Prologis is also trying a new approach: It wants to sell ever more services to its tenants, particularly smaller ones. Rather than just renting them space, for example, it might also provide their internet service or source their forklifts. A public service programme Prologis launched a few years ago to train students for warehouse work, may become a business.

“These are not permanent career jobs but they’re jobs that pay $25 per hour,” Moghadam said, claiming the widespread criticism of warehouse employment conditions had been overstated. “They’re not bad starting out jobs, and they certainly beat getting on opioids or whatever.”

In the future, he speculated, Prologis might enter the energy business by using its rooftop solar panels to generate power for its customers’ electric delivery vans. “There’s a real opportunity to help customers by bringing in more of these adjacent products and services that you need to be able to use our facilities,” he said.

It is Moghadam’s original idea — but with a few new wrinkles.


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