Amazon (AMZN) Shedding Warehouse Space as Sales Slow

Amazon.com, Inc. (AMZN) reportedly is seeking to vacate at least 10 million square feet of warehouse space, and perhaps as much as 30 million. When online sales surged during the height of the COVID-19 pandemic, Amazon rushed to add capacity that is now proving to be excess amid slowing sales.

Amazon has estimated that excess space will contribute about $10 billion in costs during the first half of 2022. Putting that figure in perspective, Amazon's operating income was $3.7 billion in Q1 FY2022, and the company's guidance indicates that it expects Q2 FY2022 operating income to be between a loss of $1.0 billion and a profit of $3.0 billion.

Amazon's Excess Space

The excess capacity reportedly includes warehouses in New York, New Jersey, Southern California, and Atlanta. Meanwhile, 10 million square feet is roughly the footprint of about 12 of Amazon's largest fulfillment centers, or about 5% of the square footage that the company added during the past two years. 

Amazon CEO Andy Jassy has stated that his company is "no longer chasing physical or staffing capacity." He pegged the cost of excess capacity to Amazon in Q1 FY 2022 at $2 billion.

How Amazon May Shed the Excess Space

One possibility is that Amazon may try to negotiate early terminations of its own leases on excess space. Since real estate investment trust (REIT) Prologis, Inc. (PLD) is Amazon's biggest landlord, it may be the other party in many of these negotiations.

Additionally, Amazon may try to sublet some of its excess space. According to a February 2022 report from Prologis, the vacancy rate for industrial space is less than 4%, an all-time-low. Also, rents rose on average by 17.6% in 2021. The upshot is that neither Amazon nor its landlords may face too much difficulty in finding new tenants and getting paid well for the space.

However, both options come with costs for Amazon. To terminate a lease ahead of time, Amazon will have to pay a penalty equal to a portion of the rent due over the remaining term of the lease. To sublet a space, Amazon will have to remove its equipment, which then either must be stored elsewhere or sold.

Finally, sources familiar with the matter indicate that, in some cases where it chooses to sublet space, Amazon may keep the term short, to as little as one or two years. The reason is that the company may want to hedge against the possibility of a rebound in sales growth that makes the space necessary once again.

Subletting Already Underway

West Coast trucking business Dependable Highway Express, Inc. recently subleased an industrial facility from Amazon measuring 300,000 square feet in the East Bay region of California. The sublease runs for five years, which is likely to be the remaining term of Amazon's own direct lease at the property.