The single-tenant property market reached new heights over the past few years. The advantages of single-tenant properties were on full display during the COVID-19 pandemic, when big chain retailers were among the only ones able to consistently pay on their leases and continue their operations. The increased need for warehouse space to meet customer demands for online purchases contributed to the growth of the market as well. Now, with the pandemic’s end in sight, are changes coming for the single-tenant property market?
Pandemic-Driven Growth of Single-Tenant Properties
The COVID-19 pandemic changed many aspects of life around the world, not the least being how we bought and sold goods. When brick and mortar stores were forced to close, customers flocked in droves to online retailers to get their goods. This was a huge boon for large online retailers like Amazon, who expanded their warehouse space considerably. Other large retailers like Walmart and Target expanded their online selling to keep up, and this required leasing more warehouse space around the country, providing great opportunities for investors to lock in long-term leases with reliable tenants.
If the pandemic proved one thing in the commercial real estate market, it was that single tenant properties, leased to larger companies, were an excellent way to ensure a regular cashflow. Multi-tenant properties took a bit of a hit, as smaller retail establishments had a more difficult time staying open enough to make sufficient funds to pay their rents. Many closed their doors permanently. Certain areas of the country, such as the Southeast and Midwest, saw the most growth in single tenant leases, but the trend was present all over the country.
Warehouse and industrial space has performed particularly well, with year-on-year rent growth exceeding 21%, vacancy at 3.4%, and total leasing volume increasing 6% year-on-year, according to JLL. Demand for space is strong, and major retailers like Walmart are adding new facilities.
Earlier this summer, Walmart announced plans for additional fulfillment centers to keep up with online sales. Fast shipping and delivery of products are now expected as a matter of course; customers are demanding same-day or next-day delivery. Walmart is well positioned to fulfill these expectations of instant gratification, with its 31 dedicated fulfillment centers and 4,700 stores. The retail giant now is within 10 miles of 90% of the population of the nation, making fast fulfillment of online orders easy. Other online retailers are also feeling the pressure to fulfill these customer expectations, and that means more opportunities for warehouse and industrial property owners to get in on the action.
Is There Danger Lurking Around the Corner?
At the same time, there are some indications that the good times may be over for owners of single tenant industrial properties. Amazon has slowed its expansion plans for the next year, citing lower customer demand as a key reason for the move. Rising inflation has taken its toll, but another key factor is that Amazon had expanded its fulfillment capacity so fast that it became oversaturated. The online retail giant spent more than half (55%) of its capital investment total in 2021 on expanding fulfillment and transport capacity.
The overexpansion was one reason Amazon cited that contributed to $6 billion in added costs incurred during the first quarter of 2022. Low performing warehouses were also mentioned as causing the additional spending. The lingering effects of the pandemic forced Amazon to hire additional workers to staff their fulfillment centers and warehouses. But as workers recovered from the omicron variant of COVID, the workforce became bloated, forcing a 6% cut in employees over the second quarter of 2022. This was the largest quarter-to-quarter personnel reduction in Amazon’s entire history, although the company’s headcount is still higher than the previous year’s by 14%.
Amazon is closing two delivery stations near Baltimore, Maryland, in the coming month. This is in contrast to previous years when the online giant looked to expand its facilities in anticipation of the holiday season. This move, and other similar ones, are partly due to Amazon’s desire to upgrade its facilities to more modern fulfillment centers.
One more potentially telling signal for owners of single tenant industrial properties is the fact that Amazon owns considerable single tenant property itself—and now the company is looking to sublease at least 10 million square feet of warehouse space. Some other major Fortune 500 retailers are expected to follow suit and return space to the market, in some cases because the facilities they invested in long ago are now simply not close enough to customers for efficient last-mile distribution.
The single tenant property market, particularly the market for warehouse and industrial space, is in a state of flux right now. Demand is still outpacing supply nationally, but online sale are largely flat. The end of the pandemic, increasing inflation and poor economic conditions, and overexpansion by big online retailers have combined to change the future of a market that looked like a sure bet just a year ago.