A Blog by Jonathan Low

 

Jun 11, 2019

How Blackstone Benefits From 'Amazon Effect' By Investing In Warehouses

A merchant named Levi Strauss made his fortune during the California gold rush not by digging, but by selling supplies to miners.

By investing in warehouse space, Blackstone appears to be following that strategy during the current ecommerce boom. JL


Laura Laughlin and Dan Gallagher report in the Wall Street Journal:

Industrial real-estate assets have been booming because Amazon and Walmart need space in proximity to big cities to handle short-term shipping. As they compete for warehouse space, rents have been firm. The 10-year compound annual return of industrial real-estate investment trusts has been 19%. Industrial space is harder to find than other types of real estate.Getting more facilities closer to customers will help Amazon save on shipping costs, which have grown to about 12% of total revenue from 9% five years ago. (And) traditional retailers with e-commerce ambitions will be competing harder to secure floor space that aids deliveries.
Blackstone clearly isn’t concerned about timing the market.
The private-equity firm run by Stephen Schwarzman, known for its 2007 blockbuster property deal that pegged the top of the mortgage market, has spent $18.7 billion to buy warehouse real estate from Singapore’s GLP . 3281 0.59% Amazon.com is one of the big rental clients for the properties. Industry benchmarks suggest it is paying a generous price but, in typical Blackstone fashion, the deal will most likely work out.
Industrial real-estate assets have been booming because companies such as Amazon and Walmart need space in proximity to big cities to handle the tricky logistics of short-term shipping. As they compete for warehouse space, rents have been firm. The 10-year compound annual return of industrial real-estate investment trusts, a reflection of the health of the industry, has been 19%, according to the National Association of Real Estate Investment Trusts.
Some industry indicators have been softening recently, though. Building has picked up pace, increasing supply, and occupancy rates of REITs are high but slightly below their peak. Blackstone owned some of these same assets in the past, having sold them to GLP in 2015. Though the portfolio isn’t identical to what was sold, the current deal price on a square-foot basis is some 50% higher than when Blackstone sold.
Industrial space is still harder to find than other types of real estate, though, Nareit data show. There is another ace in the hole that helps: Amazon’s ambition. Much of the tech retail giant’s generous valuation is premised on the company defying gravity typical for such a large enterprise. But growth in North American retail, a business that accounts for about 60% of Amazon’s overall revenue, is slowing down. Wall Street expects growth in that segment to be cut in half to 15% annually over the next three years.
To boost its prospects, Amazon is significantly beefing up its one-day shipping capabilities, and it isn’t wasting any time. The company said Monday that it now has more than 10 million products available for shipping in the one-day window, barely a month after first announcing the move.
Getting more facilities closer to customers is key to that ambition. It also will help Amazon save on shipping costs, which have grown to about 12% of the company’s total revenue from 9% five years ago. Where Amazon goes, though, so does the industry. Other clients, including traditional retailers with e-commerce ambitions, will be competing harder to secure floor space that aids deliveries. That gives Blackstone some negotiating leverage with what could otherwise be a demanding client.

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