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  • Writer's pictureRealFacts Editorial Team

Small Bay Market Emerges as Strong Industrial Performer


small bays

Amidst a landscape where the spotlight has often shone on larger industrial sectors, the small-bay tenant market is carving out its niche as a robust performer, driven by tighter supply and appealing investment characteristics. This sector, comprising properties with multiple tenants occupying spaces between 1,000 and 10,000 square feet, is capturing the attention of investors and developers alike.


A Snapshot of the Market


According to Newmark's first-quarter U.S. Industrial Market Conditions and Trends report, industrial spaces under 100,000 square feet, including small-bay assets, represent a significant 41.9% of the industrial market. These properties boast a remarkably low vacancy rate of just 4%, reflecting their strong demand. In contrast, the next largest segment, encompassing spaces between 100,001 and 300,000 square feet, holds a 27.1% market share and a higher vacancy rate of 7.4%. Properties exceeding 700,000 square feet, which have commanded much of the recent development focus, account for 13.7% of the market with a 9% vacancy rate.


A notable characteristic of the small-bay segment is the age of its inventory. A substantial portion of these buildings were constructed before 2000, which adds a layer of complexity and opportunity for modernization and redevelopment.


Growth and Investment Dynamics


Over the past four years, 100 million square feet of small-bay industrial space has been added to the market. This growth, while significant, pales in comparison to the over 1.1 billion square feet of single-tenant bulk warehouse space added during the same period. However, this contrast underscores the distinct advantages that the small-bay market offers to investors.


The small-bay sector's appeal lies in its diversification of tenancy and, consequently, cash flow. Unlike bulk distribution properties that often rely on single, large tenants, small-bay assets host multiple tenants. This diversification mitigates risk and enhances financial stability. Historically, small-bay properties traded at a premium of 50 to 100 basis points higher than bulk distribution properties. However, this trend has reversed in recent quarters due to divergent supply-side dynamics affecting sector fundamentals.


Newmark's data reveals that small-bay industrial sales volume in the first quarter of this year was 32% above the 2017-2019 average. In stark contrast, bulk distribution sales volume was 30% below average for the same period. This shift highlights the growing investor confidence and interest in the small-bay market.


Regional Highlights


Certain cities stand out as hotspots for small-bay inventory. Salt Lake City leads the pack with the highest product availability, followed closely by Miami, Los Angeles, and Dallas. These markets are benefiting from a combination of strong demand and strategic geographic positioning, making them attractive destinations for investors looking to capitalize on the small-bay sector's potential.


The Future of Small-Bay Industrial Spaces


As the industrial real estate landscape evolves, the small-bay market is poised to continue its upward trajectory. Investors are increasingly drawn to the sector's diverse tenant mix, which offers both stability and opportunity for growth. Additionally, the aging inventory presents a chance for redevelopment and modernization, further enhancing the appeal of these properties.


The small-bay market's performance underscores a broader trend towards diversification and risk mitigation in industrial real estate investments. As the sector continues to grow, it will play an increasingly important role in the industrial market, providing a reliable and attractive option for investors seeking to balance their portfolios and capitalize on emerging opportunities.

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