As the industrial real estate market recalibrates following several years of volatility, capital is returning, but not evenly. Investment activity is concentrating first in small-bay industrial, positioning the segment as an early signal of price discovery in the next phase of the cycle, according to BKM Capital Partners' Q4 light industrial market update.
Small-bay assets are attracting institutional capital ahead of a broad industrial recovery, as investors are drawn to assets with clearer income visibility, durable demand and easier underwriting. Transaction data underscores this shift. Small-bay industrial recorded approximately $2.2 billion in activity in Q3 2025, confirming strong institutional demand as the sector rebounds from its late-2023 valuation trough.
Average sale prices for buildings under 100,000 square feet rose 10.6% year-over-year, outpacing the 3.5% growth of larger properties, while overall liquidity increased 16%. Smaller transactions dominate the market, with deals under $100 million accounting for 70% of total deal volume over the past four quarters.
Vacancy for buildings under 100,000 square feet runs roughly half the rate of larger facilities, while less than 1% of small-bay inventory is under construction, compared with more than 3% for large-format industrial. Leasing demand is concentrated in units under 50,000 square feet, supporting higher occupancy and stronger leasing spreads.
Warehouse automation, projected to grow from $25 billion in 2024 to $54 billion by 2029, and AI-driven logistics are reducing space requirements, especially in last-mile markets, while improving site selection speed and boosting absorption. AI-facilitated e-commerce could account for 25% of global online sales by 2030, up from roughly 5% today, reinforcing pressure on infill and last-mile industrial.
3PL, logistics and distribution continue to drive leasing activity, averaging 254% more activity than the next four largest sectors. In Q3, 20% of all leases were executed by 3PL users, while holiday retail sales are projected to surpass $1 trillion in 2025, with 20–25% of those sales online. In 2026, roughly 25% of new leasing is expected to involve e-commerce users, as global online sales approach 20% of total retail sales.
"What stands out right now is not just demand, but where liquidity is actually returning first," Brian Malliet, chief investment officer at BKM Capital Partners.
"As valuations stabilize, we're seeing capital re-engage most decisively in small-bay industrial because the fundamentals are easier to underwrite and the income story is clearer. That matters in a market where conviction — not leverage — is driving investment decisions."
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