While large logistics hubs and distribution centers have garnered most of the attention in the industrial real estate sector, the lesser-known multi-tenant small-bay industrial segment is equally compelling.
Better known as light industrial, this segment is characterized by smaller unit sizes, a diversified tenant base, and strategic proximity to urban centers, which make it uniquely suited to address the rising demand for last-mile logistics, flexible manufacturing, and research and development spaces, according to a BKM Capital Partners white paper. Small-bay industrial accounted for a significant share of industrial leasing activity last year, with warehouses of less than 100,000 square feet logging 3.9% vacancy compared with 6.7% for larger facilities.
BKM said e-commerce is a key driver for small-bay property demand, especially same-day and next-day delivery services. Online sales grew 8.1% last year, outpacing traditional retail at 2.8% during the same period. For every $1 billion in e-commerce sales, BKM estimates 1.2 million square feet of logistics space is required. This has created demand for logistics facilities that support last-mile delivery near population centers.
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Reshoring has also created demand for small-bay industrial properties. Manufacturing spending is nearly double the pre-pandemic average, at $124.4 billion, and small-bay facilities are ideal for accommodating light manufacturing, assembly, and R&D, the white paper said.
Adaptability is one of the primary advantages of small-bay facilities. It allows properties to be easily reconfigured to suit different operational needs, allowing landlords to benefit from higher occupancy rates, reduced downtime between tenants, and the ability to cater to shifting market demands. Low competition from new small-bay development enhances the landlord-friendly aspect of small-bay facilities and allows for consistent rent appreciation.
“Unlike large-scale industrial properties, small-bay assets typically operate on shorter lease terms, enabling landlords to adjust rents more frequently to align with market conditions and capitalize on rising demand in high-growth areas,” said the report.
For investors, small-bay industrial properties offer the opportunity to achieve outsized performance and financial returns, BKM added. Because they are often underutilized or need modernization, there is strong potential for net operating income growth, yield optimization, and capital appreciation. Enhancements, including energy-efficient upgrades and modernized layouts, can drive increased occupancy rates, attract higher-quality tenants, drive rent growth, and result in better tenant satisfaction and retention, reduced vacancy risk, and improved asset valuation, according to BKM.
While small-bay industrial properties present compelling investment opportunities, they are not without challenges. The white paper noted several issues, including regulatory and zoning challenges, community opposition, and localized disruptions.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
