Amazon's $2B Shift: Data Centers Over Warehouses?

Don't underestimate the impact of innovation. Amazon is pouring billions into developing technologies that are gonna revolutionize how warehouses operate, how supply chains function, the whole thing.

Welcome to our Industrial Advisors podcast. You have Bill Condon and, and Matt McGregor. And, uh, people always ask us and, and always wondering what is going on with Amazon. So we thought we would do a podcast on all things Amazon Western region. Yes. We started doing some research on water research, everything that they're up to. Yeah. And so what have you learned? Well, first, you know, when we talked about doing a podcast on Amazon, we've talked about it before. We don't represent 'em right.

So we don't. No. No. And so we were like, well, we better get it right. Amazon's the largest company in Seattle. They're the largest user of industrial real estate. If we're gonna do a podcast, we better be experts. So we did a few things into the research. We went out to all our western region guys, Hey, what's Amazon doing right now? Are they taking space? Are they giving space back? And kind of we're gathering those facts.

We, you know, did our Google search, our news searches and all that and started gathering them. The more information we got, the more confusing it was, right? Yeah. Right.

So, uh, long story short, a friend of mine, uh, 'cause we're podcasters said, oh gosh, you gotta use this podcast technology to warm you up for podcasts or to just create a podcast so that you understand something better. So I go to this format going, I'm gonna dump all of this content into this ai. Bought. Okay. So I took the emails from the West Coast Connections Group, all the stuff they said about Amazon. I took the articles, I took everything, and I dumped it in.

And then I said, Hey, create like, you know, we're podcasters and you know, create like a 15, 20 minute podcast on what's going on with Amazon On the west coast. Yeah. Western region. I clicked go, okay. It calculated and formatted and did all this in about one minute. It created the podcast that the listeners are actually going to hear. What I was gonna do is just listen to it, learn, and then regurgitate. Ate it. Re it. Yeah. Right? Yeah, yeah. But I was like, this is cool.

This is crazy technology. So let's combine our update on Amazon. Yeah. With crazy and unique AI technology. So this podcast is not gonna be hosted by Bill Khan and Matt McGregor. It's going to be hosted by. Two bots. Yeah. I hope you enjoy this update on Western region, what's going on with Amazon. Thank you.

Hey everyone. Welcome back to the deep dive. We're diving into something today that I know a lot of you out there, especially our industrial broker listeners, are really curious about and that's what exactly is going on with Amazon. Yeah. Especially out west. Right? Exactly. Exactly. You know, we talk to you guys all the time and we've been hearing this kind of shared feeling.

This sense that things are maybe slowing down a bit, that Amazon's not quite as active in the western industrial market as they used to be. Yeah. It's been pretty quiet, especially in those prime infill markets. Not a whole lot of those big, splashy new warehouses popping up like we used to see. Right. And a lot of you're wondering, okay, what does this mean? Is Amazon pulling back? Are they shifting gears? What's the bigger picture here?

Hmm. So that's exactly what we're gonna unpack in this deep dive. We've been digging into the latest industry reports, their financial statements, and of course all the real estate transaction data we can get our hands on to try to get a clearer picture of Amazon's current strategy. And what we found is, well, let's just say it's actually pretty interesting what you're seeing on the ground, that sense of less new development in those western infill areas, it's probably accurate.

But the data reveals a much bigger story, one that's maybe not so obvious at first glance. So they're not exactly hitting the brakes though. Not at all. In fact, they're spending a ton of money. I mean a lot of money. Yeah. In 2024 alone, they spent over $2 billion on industrial properties. Wow. 2 billion. Yeah. More than double what they spent in 2023, which was 920 million. That's a huge jump. It is, and here's the thing that's really important for you as industrial brokers to understand.

It's not all going into logistics. Oh, interesting. Okay. So where is it going?

A big chunk of that money, a really significant portion is actually going towards acquiring land for AWS data centers. AWS is in Amazon Web Services, their cloud computing arm. Exactly. And that shift, that strategic pivot towards data centers. It's being driven by, you guessed it, the AI boom. Ah, so it's not just about getting those packages delivered faster anymore. Yeah. This sounds like a much more fundamental change in their focus.

It absolutely is, and it makes sense if you think about it in the context of the larger economic picture. Consumer spending habits are changing and Amazon's adapting to that. They're always quick to adapt. They are. And one thing that Moody's Analytics pointed out in their report is that Amazon's in a really strong financial position right now. They have a lot of liquidity, which gives them the flexibility to make these kinds of strategic shifts very quickly. So they see an opportunity.

They have the cash I. Boom, they're in. Exactly. And what they seem to be seeing right now is a massive need for data center space, and they're going after it in a big way. In 2024, they bought at least 3000 acres of land across 14 states, all for data center development. 3000 acres. That's, that's a lot of land. That's like a small city. It is. And a lot of that activity, a really noticeable concentration of it has been in Central Virginia. Oh, right.

The place everyone calls the data center capital of the world. Yeah, exactly. And you can see why Amazon poured about $640 million into Central Virginia last year, 2024. That's almost 25% of their total industrial property spending for the whole year, just in that one region. And they weren't messing around with those purchases either? No, they were not. They paid like $218 million for 91 acres in Manassas, and another 57 million for 39 acres nearby.

They even bought three existing data centers in Sterling for 136 million. That's a pretty serious commitment. Sounds like they're really planting their flag there. Yeah, and what's interesting is that Moody's Analytics says they're playing a long game with these data center sites. They're calling it a land banking strategy. I. They buy the land and yeah, they might develop it pretty quickly if they need to, but they're also comfortable holding onto it for a while, maybe even one to five years.

So they're not just reacting to immediate demand. They're thinking ahead. Exactly. They're building for the future. And that kind of financial flexibility, that ability to think long-term is something that very few companies can do. And it makes sense when you consider how much money AWS brings in. I mean, for those who don't know, AWS is a big deal. It's a huge part of Amazon's business. It is in the third quarter of 2024 alone, AWS brought in about 16% of Amazon's total revenue.

Wow. So as AI keeps growing, which it seems like it's only gonna do that, reliance on data centers is only gonna become more and more important. Exactly. Data centers are the foundation for everything they're doing in the cloud, and especially with ai.

Now, let's switch gears for a minute and talk about the logistics side of things. Mm-hmm. Because it wasn't that long ago that we were all hearing about Amazon. Scaling back their warehouse footprint right in late 2022 and early 2023. They definitely did some adjusting. M-W-P-V-L International reported that they closed or delayed something like 99 facilities, which totaled about 32 million square feet. That's a lot of space. It is.

But I think what we're seeing now is that that was more of a course correction after a period of really, really rapid growth during the pandemic. So kinda like a rebalancing. Right. Exactly. And now in 2024, we've actually seen a renewed push to expand their logistics network. The Wall Street Journal reported that this is all about getting closer to their customers so they can offer more same day deliveries. Which makes sense. Everyone wants things faster these days, right?

And to do that, they need more warehouses and distribution centers spread out across more locations closer to where people live. And we've seen them making some big moves in that direction, haven't we? Oh, yeah. Their biggest purchase last year was a 2.8 million square foot fulfillment center in Daytona Beach, Florida, 2.8 million sports. But yeah, it's massive and it's all robotics driven. They paid $394 million for it. Wow. Sounds pretty high tech.

It is, and it's set to open pretty soon and beyond. Daytona, they made at least seven other industrial purchases last year that were over a hundred million dollars each. We saw activity in Virginia, obviously, but also in Florida, Arizona, California and Indiana. And while Daytona was mainly about logistics, most of those other big purchases were actually for data center development. Interesting.

So now let's bring it back to what's happening in the West, because I know that's what a lot of our listeners are really focused on and you know, our colleagues over at West Coast Connections Group have been giving us some great insights into the market there. Yeah, they've been keeping a close eye on things. And what's interesting is that, you know, at the national level we see these big trends, but how they play out in different regions can vary quite a bit.

And that's definitely true in the West. Absolutely. So West Coast Connections Group has confirmed that Amazon bought 160 acres of land in Hesperia in the fourth quarter of 2024. And there were a few really big pre-lease that went down to over 1.1 million square feet in Fontana, another million square feet in Drupa Valley, and just over a million in Ontario.

Those were all in the first half of the year, and there was another big pre-lease over 1.2 million square feet in Hesperia that happened late in 2023. That one might be connected to Maersk, actually, potentially for some kind of Amazon product. Hmm. Yeah, it is. But the thing that your colleagues at West Coast Connections Group have been emphasizing, and it really echoes that initial sense of a slowdown that you were talking about, is that Amazon's been pretty quiet.

Intel markets, they've seen very few new facilities opening and some older ones are even being shut down or just sitting empty. Wow. So even though they're spending all this money elsewhere. In those core Western markets, they seem to be taking a step back. It seems that way, and it really makes you wonder if there's a shift happening in their logistics strategy, at least for those more densely populated areas. Yeah, that's a really good point. But here's another interesting wrinkle.

Dan Dougherty at West Coast Connections Group told us about something pretty interesting. Apparently there's a search going on right now for about a million square feet of space, and it's being conducted by not one. But five different third party logistics providers. Five different three pls. Yep. CEV, Maersk Rider, IDL, and DP World. They're all looking for space with a three year lease term, and the thinking is that it's ultimately gonna be for Amazon.

So even if Amazon isn't directly leasing the space themselves, they might still be expanding their footprint through these three pls. Precisely. And that's something to keep in mind. Just 'cause you don't see Amazon's name on the lease doesn't mean they're not involved. Right. It could be happening under the radar. Exactly. And if we look at the Phoenix market.

Don McWilliams reports that Amazon already occupies almost 18 million square feet there, spread across 34 buildings, and they're still seeing big space requirements coming from KBC, though nothing's been finalized yet. So it's not like the west is completely dead, it's just while the nature of their involvement might be changing a bit. Makes sense.

So with all this talk about data centers and logistics and shifting strategies, I'm really curious about the innovation side of things. What's Amazon doing to push the boundaries of how they operate? You know, all that cool tech stuff that they're always working on. Oh yeah. That's where it gets really exciting. This is the stuff that's gonna have a major impact on the industrial sector as a whole.

I. Amazon's got this thing called the Industrial Innovation Fund, and they've poured a billion dollars into it. A billion dollars. Yeah. And the whole point of it is to invest in companies that are developing cutting edge technologies for warehouse automation and supply chain innovation. So they're not just building buildings, they're investing in the future of how those buildings operate. Exactly. And they're putting their money where their mouth is.

They've invested in companies like Right bot, which is working on technology to automate the unloading of shipping containers, which is something that's still very manual and time consuming. So basically robots unloading those giant containers instead of people. That's the idea. And then there's Instock, which has developed this really cool robotic storage and retrieval system for warehouses. It's all about optimizing how inventory is managed. Sounds like something out of a sci-fi movie.

It does, doesn't it? But it's happening now and then there are these innovation challenges that they run. They're basically competitions where they invite companies to come up with solutions to specific problems. I've heard about those. What were some of the challenges they had last year? Last year, 2024, they had one focused on packaging visibility and another on yard orchestration. Okay, break those down for me. What does that even mean?

So packaging visibility was about finding ways to track what's inside packages without actually having to open them. That makes sense. You don't wanna be opening every box to see what's inside. Right. And they were looking for solutions that use things like AI powered computer vision, where computers can basically see and identify objects and millimeter wave technology, which can penetrate materials to get a sense of what's inside. This is kind like an x-ray vision for packages. Yeah, kind of.

And then the yard orchestration challenge was all about improving the flow of trucks in and out of their sorting facilities. They wanted to optimize truck scheduling, how they deploy labor, even the layout of the yards themselves. Sounds complicated. It is. But they had some really smart companies working on it. Companies like locs, Omnis, and E-I-G-L-E. These are companies that specialize in logistics, software and AI driven automation.

And just recently they launched a new challenge in Europe focused on automating the first mile of their operations. The first mile. Yeah. That's the part where packages get picked up from sellers and move to the first sorting facility. It's a really crucial part of the process and one that's still pretty manual in a lot of cases. So it sounds like AI and robotics are playing a huge role in all of this.

Absolutely. The head of the Industrial Innovation Fund, Francisco Bosar, she's predicting even more widespread use of AI and machine learning and industrial technologies this year. She thinks advancements in computer vision are gonna be really key, enabling things like. Vivian's ai, which can track inventory and warehouses with incredible accuracy, and there's a lot of excitement about the progress being made with bipedal robots. Those robots that walk on two legs.

Amazon's actually running a pilot program with agility robotics digit robot right now. I've seen videos of that robot. It's pretty mind blowing. It is, but it's important to remember that it's not just about replacing humans with robots entirely. A big part of this is about finding ways for humans and machines to work together more effectively. So collaboration, not just automation. Exactly. I. And they're finding that this collaborative approach actually leads to a safer work environment.

Amazon's data shows that incident rates are lower in facilities that have implemented robotics, and they're developing systems like Sequoia, which combines a bunch of different robotic technologies to speed up inventory processing, and it's designed specifically for humans and robots to work side by side. It's amazing to see how far this technology has come. It makes you wonder what the future holds, and it's not just robotics that they're thinking about.

It's wild to see them looking into things like small modular nuclear reactors as a long-term energy solution. Yeah, that one really caught my eye too. It shows just how seriously they're taking their sustainability goals and how far ahead they're thinking when it comes to their energy needs, especially with those data centers using so much power. That's a project that's gonna take a while to come to fruition, but it highlights their long-term vision.

Okay. Before we wrap things up, I wanna touch on something that seems a little unrelated, but could actually have some indirect implications for the industrial real estate market.

And that's Amazon's mandate for employees to return to the office five days a week in Seattle. Ah, yes. The return to office push. Exactly. So how do you see that potentially impacting things even indirectly? Well, it's an interesting point. Their goal with that is to try to revitalize downtown Seattle to bring more life back into the urban core. And we are seeing more and more companies, not just Amazon encouraging or even requiring employees to come back to the office.

So while this is primarily affecting the commercial office real estate market, it's having a ripple effect as more people are working downtown, that creates more demand for things like restaurants. Shops and services, which in turn could lead to increased demand for logistics and warehousing space to support those businesses. Oh yeah, that makes sense. So it's kind of a chain reaction, right? And it's something to keep in mind.

Changes in one area of real estate can often have unexpected impacts on others. It's all connected. It really is. And one last thing I wanna highlight is the increase in Amazon's owned property. It's pretty significant. Yeah. Their latest financial reports showed that they now own 36.8 million square feet of warehouse and data center space up from 25.6 million the year before. That's a pretty big jump.

It is, and they're planning to spend something like a hundred billion dollars on capital expenditures this year. And a lot of that is going towards AWS and their AI infrastructure, right? So the takeaway there is that they're not slowing down, not by a long shot. They're just shifting their focus and investing heavily in the areas that they see as key to their future growth.

So to sum it all up, for our listeners out there, especially those of you working in the Western region, what are the key takeaways? Well, first it's important to remember that even if you're seeing less of that traditional big box, Amazon warehouse activity in your market, they're still a major player and they're investing a ton of money in industrial real estate. Right. It's just that a lot of that money is going towards data centers, not fulfillment centers. Exactly.

And those data centers are popping up. All over the country, not just in the west. And second, don't count Amazon out of those Western infill markets entirely. They might be quieter there when it comes to direct leases, but they're still active. We're seeing them working more through three pls, and those large space requirements are still out there. So it's about looking beyond those big obvious deals. Yeah, and paying attention to. The more subtle moves they're making. Right?

And third, don't underestimate the impact of innovation. Amazon is pouring billions into developing technologies that are gonna revolutionize how warehouses operate, how supply chains function, the whole thing. So for all of our industrial broker listeners out there, the big question is. How is all of this going to reshape the industrial real estate landscape in the years to come? That's the million dollar question, and I think the answer is, well, we're gonna have to wait and see.

But one thing's for sure, it's gonna be fascinating to watch it unfold. It really is. And for all of you listening, we wanna hear from you. What are you seeing in your markets? How do you think these trends are gonna play out? Let us know. And as always, thanks for diving deep with us. Thanks for listening to our first ever AI bot. Podcast on all things what's going on with Amazon and the Western region. I hope you enjoyed it. Crazy technology. Thank you.