Amazon’s Huge Warehouse!

Video Index:

0:00 Amazon’s largest warehouse yet will be located in Ontario
01:52 Are we in a housing bubble?
04:25 Retailers are helping customers deal with rising gas prices

Hello Investors!

Amazon just signed a lease for its largest warehouse yet – 4.1 million square feet of warehouse space in Ontario. Just how big is 4 million square feet? It’s the equivalent footprint of seven Great Pyramids, 16 Roman Colosseums, or 71 football fields. The plan is to place this new warehouse on 370 acres near the Chino airport that was formerly used for agriculture and dairy farming. It’s expected to be along Merrill Avenue between South Grove and Carpenter Ave.

The rental is an unexpected development because Amazon has been moving away from leases and more toward owning its properties, particularly for its larger buildings. In fact, Amazon spent $450 million on new purchases over the last year. But this lease shows that Amazon is still interested in renting space for its distribution centers under the right circumstances.

The Inland Empire is the country’s top market for industrial real estate, and currently has 42.5 million square feet of industrial space under construction, of which about 10 percent is this one warehouse for Amazon, and with all of this industrial space in the IE, it has only a 1.6% vacancy rate which is just incredible!

Although I focus on retail real estate, the effect of Amazon and other online retailers is undeniable on shopping centers.

Are we in a Housing Bubble?

It’s clear that many people these days are worried about the state of the housing market. Specifically, they want to know: are we in a real estate bubble that’s about to burst?

This chart shows how housing prices have gone through the roof over the past two years. A recent article in Forbes doesn’t believe that we’re in a bubble, and I tend to agree. Here are four reasons why:

1. Strict Lending Standards

Lenders are still only lending to those with good credit, and are checking full financials. Banks are wary about being fined for violating the regulations put in place after the 2007 crisis, so they are holding buyers to high standards.

2. Rising Mortgage Rates

Rates have skyrocketed since January, and they will most likely continue to rise throughout the year. As borrowing becomes more expensive, it will naturally keep speculation from becoming too rampant.

3. Plenty of Equity

In the last housing bubble, people found themselves in an underwater position, with loans worth more than the value of their houses. They had put little to no money down on the house, so foreclosure was their only option when things got tough. Today, homeowner equity is at an all-time high. Few people will walk away from a home that has so much money tied up in it.

4. Housing Supply and Demand

Before the last bubble, new home construction outpaced demand. But now, new home construction has lagged, failing to keep up with a growing population. There is a critical housing shortage, and builders are struggling to keep up. There are currently 1.62 million residential units under construction, which is the highest level since 1973. It’ll take years for supply and demand to balance again.

The Dallas Federal Reserve Believes that We May Be in a Bubble

But there are opposing views on this topic, one of which comes from the Federal Reserve of Dallas, which does believe we are in a bubbly market but doesn’t expect the same level of a crash as we saw in 2007.

Exuberance indicator

They believe that the market is showing exuberance, which means prices are increasing at a rate that economic fundamentals cannot justify.

High prices

They also think that home prices are too high compared to the cost of future rents – a metric that was also elevated before the last bubble. 

Ratio of home prices to disposable income

Finally, they are concerned that the ratio of home prices to disposable income is artificially high because income came from pandemic-related sources like government stimulus.

So, who’s going to be right? No one knows for sure. But I still think that the housing market and the commercial market still have a good run ahead. What happens in the commercial market tends to follow what happens in the residential market, since typically the longer leases in commercial real estate insulate property owners from the immediate effects of what’s happening in the economy. I can tell you that retail commercial activity is still strong, with cap rates at all-time lows, and very low inventory.

Retailers are helping customers deal with rising gas prices

With the average price of gas over $4 per gallon, Americans are feeling pain at the pump. But some companies are using creative methods to ease that burden. For example, Krispy Kreme is having a little fun with the issue. They claim that they are tapping into the “strategic donut reserve,” and are selling a dozen glazed donuts for the price of a gallon of gas each Wednesday. This is more than half off the usual price. Fast-food chain Bojangles is also doing its part to help customers by handing out $10 gas cards to 100,000 customers who order a family meal at one of their restaurants.

While some businesses are providing gas relief, others are using rising fuel prices to help drive traffic and sales. Some examples are all the big-name membership warehouse clubs that have branded gas stations. These are often less expensive than other gas vendors.

For example, Costco has seen its overall sales jump as gas sales act as a draw for new memberships. Sam’s Club is offering a 10% in-store credit every Tuesday for club members who use its credit card at any gas station. And BJ’s is giving 50 cents off per gallon to those who spend $100 or more in the club. If they use a BJ’s credit card, they get an additional 10 cents off per gallon. Sam’s and BJ’s are using these promotions as traffic drivers to get customers in the door.

Some grocery chains, such as Albertsons, are promoting their loyalty program for purchases made at its stores. The rewards from this program include money off of groceries or gas – up to 10 or 20 cents off per gallon.

I hope you enjoyed this week’s newsletter and learned something. Thanks for reading and I’ll see you next time!

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Mike Lin, CRE