Record e-commerce growth sent industrial warehouse demand soaring in the past two years. Amazon — the largest e-commerce giant with 56.7% of the U.S. market — doubled warehouse capacity during COVID but has a new problem: too much warehouse space.

Amazon bit off more than it could store

Amazon is one of the most prominent industrial warehouse tenants — occupying eight of the ten largest U.S. industrial projects in 2021. In the U.K., Amazon made up a quarter of all leased warehouse space in 2020 and 2021.

Amazon warned that they have “too much [warehouse] space” on its earnings call — sending warehouse stocks cratering.

• According to Bloomberg, Amazon is considering subletting 10 million square feet of warehouse space to fix its problem.
• For perspective: That’s nearly a third of the estimated 27 million square feet of total warehouse space being developed in 2022.

According to individuals familiar with the matter (BBG), the space Amazon releases to the market could far exceed the estimated 10 million square feet.

Will the extra demand be a problem?

In 2021, the U.S. industrial warehouse market was so hot that companies struggled to find warehouse space. Some customers were acquiring warehouses with 50% more capacity than needed.

But e-commerce growth has slowed, and investors are worried warehouse demand will fall across the market. So far, the first-quarter numbers of 2022 show the industrial warehouse market remaining strong.

• U.S. vacancy rates reached 27-year lows of 4.2% in the U.S..
• Industrial rent grew 15.2% compared to the same period last year.

Per one warehouse owner exec (FT), smaller e-commerce retailers “playing catch up” could continue to drive growth.

Investors: Has the market overreacted?

Prologis (NYSE:PLD) — the world’s largest warehouse owner whose biggest tenant is Amazon — fell over 30% in the weeks following Amazon’s warning. But Amazon only made up 4% of Prologis’ net rent in 2021 and is one of many giant tenants in the market.

Industry giants also have different perspectives on the health of the warehouse market.

• In May, Prologis forecasted strong demand that will continue to outpace supply — while raising their 2022 industrial rent forecast to 22%.
• Prologis even revealed a bid to buy another major industrial warehouse owner — Duke Realty (NYSE:DRE) for ~$24B in an all-stock deal.

Duke Realty rejected the offer after already turning down a previous Prologis offer in November. Warehouse owners are betting on themselves — regardless of what investors think of their stock prices.