Analysts are wondering how Amazon’s growth into fashion will affect retail investment real estate. Some consider that it portends even more pressure on retailers.
Faster Growth of Amazon Fashion Could Rock Retail Real Estate
Lost in the coverage of Amazon’s very public search for a second, multi-billion dollar national headquarters, was the barely-noticed lease the company signed in New York City last month. Yet that lease could signal billions of dollars in losses coming for retail commercial real estate across the country.
Although it didn’t make the headlines, Amazon just signed a 15-year lease in New York’s Garmet District for more than 300,000 square feet of space. Writing for CoStar, Mark Heschmeyer notes that:
Amazon will take the entire sixth and seventh floors of the 2.15 million-square-foot tower as well as part of the eighth and 10th floors in a move that is expected to bring 2,000 jobs to the Penn Plaza / Garment District submarket of Manhattan.
This came on the heels of their purchase of a 40,000-square-foot fashion photo studio in Brooklyn. As put by Paul Kotas, Amazon’s senior vice president of worldwide advertising:
We’re excited to expand our presence in New York – we have always found great talent here.
Heschmeyer says that “those jobs will be coming primarily in the Amazon Fashion and advertising divisions, and that signals the online retail behemoth is getting more serious about advancing its fashion and apparel sales”. He adds that:
In the past year alone, it has introduced seven private apparel brands to its Prime members, including Goodthreads, Amazon Essentials, Paris Sunday, Mae, Ella Moon, Buttoned Down and Lark & Ro.
What’s The Worst That Could Happen To Investment Real Estate?
Well, it’s pretty bad, according to Heschmeyer. The worst-case scenario he sees looks something like:
Sharp declines in retailer revenue and margins, along with accelerated store closings, would likely drive significant cash flow erosion and weaken credit profiles for apparel-focused retailers, mall REITs and retail-heavy CMBS deals…
A report from Fitch Ratings suggests that “this shock would likely fan out broadly across much of the retail real estate sector, with large credit profile effects on mall REITs and retail-heavy CMBS transactions. Large-scale store closures, going well beyond previously announced cuts, would likely follow”.
However, and also according to the report from Fitch:
Assuming Amazon’s share gains are concentrated in lower price points, low- to mid-tier apparel retailers, including JC Penney, Kohl’s and Dillard’s, would face intense competitive pressure in such a scenario.
What If Amazon Fashion Does Not Take Off?
In any case, Heschmeyer doesn’t think an Amazon win in fashion is guaranteed by any means, saying that:
fashion and apparel margins and sales are thin and thinning out, and could present a tough market for Amazon to break into…
He points out people like Jason Polley, managing leasing director of StoneCrest Investments in Germantown, TN, who says:
Amazon clearly has retailers scrambling to evolve and better integrate their brick and mortar stores with their online presence.
Apparel has always seemed to be an area of retail that requires a brick and mortar presence for the customer to see, touch and try on merchandise before a purchase, as on-line purchases of apparel have a much higher return rate compared to other products sold online…
Changing Markets Mean Investors Need Expert Help
Whichever way Amazon’s foray into fashion goes, it’s a fact: the world of commercial investment real estate is simply changing too fast for you to keep up with everything yourself. Put the experts at Pacwest Commercial Real Estate to work for you by calling 541-912-6583 today.
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