Small Bay Market Emerges as Strong Industrial Performer

While much attention and development activity has focused on larger industrial categories over the past several years, the small-bay tenant market is emerging as a strong performer on tighter supply and attractive investment characteristics.

The small-bay industrial market consists of properties with multiple tenants between 1,000 square feet and 10,000 square feet. Industrial spaces under 100,000 square feet, including small bay assets, represent 41.9 percent of the industrial market and have a vacancy rate of 4 percent, according to Newmark’s first-quarter U.S. Industrial Market Conditions and Trends report. A significant portion of the segment’s buildings were built before 2000.

The next largest segment is the 100,001 square foot to 300,000 square foot tranche with 27.1 percent share of the market and 7.4 percent vacancy. On the other end of the spectrum are properties exceeding 700,000 square feet, which account for 13.7% of the industrial market and have a vacancy rate of 9%.

Over the past 4 years, 100 million square feet of small-bay industrial space has been added to the market, according to Newmark. This compares with more than 1.1 billion square feet of single-tenant bulk warehouse space added.

The small bay segment is increasingly attractive to investors because it provides diversification in tenancy and therefore cash flow, as well as greater tenant management and fewer credit tenants. It has historically traded 50 to 100 basis points higher than bulk distribution properties, but this dynamic has reversed over the past few quarters due to divergent supply-side dynamics impacting sector fundamentals. Small bay industrial sales volume during the first quarter of this year was 32% above its 2017-2019 average. Bulk distribution sales volume was performing 30% below average for the same time period, said Newmark.

Salt Lake City had the highest product availability of small bay inventory, followed by Miami, Los Angeles and Dallas, the report said.