The Real Deal New York

Amazon’s mysterious ways

It’s notoriously secretive about its real estate negotiations, and Amazon’s next moves are nearly impossible to guess, but as the company expands its brick-and-mortar presence with Whole Foods, competitors brace for what’s next
By Erin Hudson | May 21, 2018 10:00AM

(Illustration by Sebastien Thibault)

Ask any broker who’s dealt with Amazon to tell you what it was like, and they’ll present you with an airtight nondisclosure agreement prohibiting them from speaking. “Under the radar” doesn’t even begin to describe the company’s ultra-discreet approach to its real estate deals, especially as it’s bought up, or leased, more and more property with each passing year.

Second only to Apple as the world’s most valuable company, Amazon, with an estimated worth of $768 billion, has the potential with every move to reshape each market in which it operates. But it was the acquisition of Whole Foods Market for $13.7 billion last August that’s brought an even greater urgency to competitors’ attempts to divine the e-retailer’s next moves.

Grocers, for one, are “scared shitless” about what Amazon might do next — though they’d never admit it publicly, said MWPVL International’s founder and President Marc Wulfraat, whose firm consults on supply chain, distribution and logistics for major American companies within the food and beverage sector. One reason for panic? Amazon “can spend a billion dollars tomorrow and not notice it,” Wulfraat said.

“I can assure you this is top of mind for everybody,” he continued. “A lot of companies are worried sick right now. There’s a lot of boardrooms where this is the dominant discussion, and they’re asking, ‘What do we do to defend ourselves?’”

As with the hotly anticipated announcement of the location of Amazon’s second North American headquarters, the e-commerce giant’s apparent penchant for the element of surprise has the retail industry on tenterhooks, with competitors desperate for clues about how Amazon may leverage its ownership of the grocery chain’s 470-plus stores.

John Schoettler

The company’s CFO, Brian Olsavsky, was characteristically coy about future plans when discussing its recently launched two-hour Whole Foods grocery delivery, which was available for Amazon Prime members in 10 cities as of press time.

“We’re going to use the 10 cities as a test and see how customers respond, just like we always do,” he said on a Q1 earnings call in late April. “Then we’ll announce expansion plans once we digest that.”

Inside the jungle

While CEO Jeff Bezos is no doubt the most recognizable face of the Amazon brand, the man responsible for the company’s real estate expansion keeps a much lower profile. Real estate chief John Schoettler, a born and raised Seattleite who’s been with the company since 2001, leads an in-house team that is estimated to number under 100 people, according to one source with knowledge of Amazon’s real estate operations who wished to remain anonymous.

As the most senior man at the top of the mysterious team, Schoettler, whose official title is vice president, global real estate and facilities, may not appear on national news shows, but he talks to local media and serves on a number of community organizations’ boards on behalf of Amazon. In 2005, Schoettler told the Seattle Times he instigated a company-wide real estate plan with Bezos’ blessing and only one condition: that Amazon’s main headquarters stay in Seattle. Schoettler has since overseen the company’s office space as it ballooned to 8.1 million square feet as of last year, making Seattle into America’s largest company town, with Amazon occupying 19 percent of the city’s office stock.

But the bulk of Amazon’s real estate portfolio is in the booming industrial sector, which serves as the backbone of the delivery service it’s become known for. Last year, the e-retailer’s North American property devoted to its supply chain — including fulfillment and data centers — totaled 4.4 million square feet owned by the company, and 131 million square feet that it leased.  The team’s strategy is ultimately overseen by senior vice president of Worldwide Operations Dave Clark, says a source in the industry.

Amazon’s real estate empire is growing by bigger and bigger increments each year, public records show. The company acquired $9.6 billion in property and equipment under capital leases last year, compared to $5.7 billion in 2016 and $4.7 billion in 2015. (The company’s report does not break out expenditures on property alone.) A similar increase occurred with property and equipment under built-to-suit leases: In 2017, the company spent $3.5 billion — more than double 2016’s $1.2 billion.

And the spree seems far from over. With job descriptions posted online in late April, Amazon was hiring  team managers to work with its North American and European real estate teams and noted that the job required working in “an extremely fast-paced environment with a high degree of ambiguity.” To qualify for a Seattle-based transaction manager role, candidates had to have experience managing deals for industrial operations at a national level and maintaining a minimum $20 million dollar deal flow.

“I just hear that [the Amazon real estate team] is responsive when they’re ready, but it’s otherwise hard to get a hold of them,” said the source who wished to remain anonymous. “I think they work pretty hard.” According to an industry source with direct experience in the company, Amazon’s in-house team is split into four main groups: the industrial team, which is by far the largest; Schoettler’s corporate office team, which is thought to number less than 12 people; a team dedicated to Amazon Web Services’ server farms; and the retail team, which handles brick-and-mortar bookstores and is driven by employees who are not from traditional real estate backgrounds.

Michael Frankel

But they do outsource some of the work. To expand its Seattle campus, the company teamed up with Vulcan Real Estate beginning in 2007, while Seattle firm KBC Advisors, whose website says it is made up of 13 people, is one of the external teams Amazon’s industrial team works with, according to the Puget Sound Business Journal. KBC confirmed that Amazon was a client but declined to comment further. The industry source with knowledge of the company’s operations estimated that Amazon’s industrial team numbered about 80 in-house, but, with their property management team from CBRE factored in, the total team would be around 400. CBRE declined to comment on its dealings with Amazon. 

What’s next?

Amazon will continue to expand its real estate holdings as per the dictates of its customer data, said Cooper Smith, director of research at business intelligence firm L2. Smith added that he expects Amazon to capitalize on its own infrastructure by expanding into offering carrier and delivery services, much like how the company already facilitates online sales between third parties.

The company is about halfway to its goal of having a warehouse within 20 miles of every U.S. consumer due to a rapid buying spree over the past several years, according to Smith, who added, “but Walmart’s already there.” As of 2017, Walmart operated out of a total of 179 distribution facilities across the U.S. and had a portfolio of 5,358 stores;  the vast majority of both are owned, not leased, by the company, according to annual filings. 

If Amazon wants to be within 20 miles of every customer, it needs to lease more industrial properties within city limits, which is a challenge in what has become an extremely tight market from coast to coast, experts said.

“There’s essentially no more land,” said Michael Frankel, co-CEO of Rexford Industrial Realty, a REIT that specializes in developing and leasing small-to-medium property in densely populated areas. Amazon leases a medium-sized facility from it in Glendale, California.

“The need to find hybrid models is really intense. We think Amazon will need more warehouses that are truly in infill locations, not far from Whole Foods stores,” he said.

And that initiative seems to be underway, as Amazon has been adding distribution capabilities to its Whole Foods stores in Los Angeles.

A source told Bloomberg in late March that Amazon was searching for larger locations for Whole Foods where the properties could be a hybrid of a store and a fulfillment center. Currently, stores are just under 40,000 square feet; now Amazon-Whole Foods is requesting stores up to 80,000 square feet. They also reportedly directed one of their landlords, Regency Centers Corporation, to convert some parking spots at Whole Foods stores into stalls for delivery drivers.

But Amazon’s strategies vary widely between cities. A person who works with Whole Foods’ real estate group told The Real Deal they hadn’t received any new directives and it was “business as usual.”

“We haven’t seen any difference at all,” the source said. “I don’t think the plan —if there is one — is so gelled that [they are] incorporating it into any of their real estate strategies yet.”