Small Bay Light Industrial's Appeal
It is a burgeoning subsector.
By Frank Forte | August 06, 2024
As the industrial real estate market continues to evolve, investors are increasingly turning their attention to small bay assets, which are emerging as an attractive alternative to traditional big-box warehouses. This shift is driven by several factors that make small bay properties a compelling investment opportunity in 2024 and beyond.
Small bay industrial properties offer a unique value proposition for investors. Unlike larger single-tenant warehouses, which have been the domain of institutional investors and carry a binary risk/reward ratio, small bay assets provide a diversified tenant mix and cater to a wide variety of businesses. This universal appeal makes them more resilient to market fluctuations and economic shifts.
One of the key advantages of small bay assets is their built-in inflation protection. With shorter lease structures and higher tenant demand, these properties allow investors to adjust rental rates more frequently in response to market conditions. This flexibility is particularly appealing in the current economic climate, where inflation concerns are top of mind for many investors.
The limited supply of small bay assets is another factor driving their investment appeal. New construction of small bay warehouses has been lagging, primarily due to urban zoning restrictions, scarcity of suitable land, and high construction costs. This supply constraint has led to a highly competitive market, increasing the value of existing small bay properties.
Looking ahead to the end of 2024, the demand for small bay industrial space is expected to continue to grow. This trend is fueled by several factors:
Changing supply chain dynamics: The need for better supply chain management and consumer demands for faster delivery times are making small bay assets crucial for businesses looking to position their products and services closer to customers.
Population growth in key markets: The surge in population in certain Metropolitan Statistical Areas (MSAs) in the U.S. is driving increased demand for service-based businesses such as HVAC contractors, material suppliers, and mechanics – all of which typically occupy small bay spaces.
Onshoring activities: The resurgence of domestic manufacturing and production is creating new opportunities for service-based businesses that support these industries, further boosting demand for small bay industrial space.
As demand remains steady, rent growth for small bay properties is expected to outpace that of larger industrial assets. Small bay properties, often located in densely populated infill areas, benefit from higher barriers to entry and replacement costs. This advantageous positioning, combined with the flexibility to adjust rental rates more frequently, has contributed to above-average long-term rental growth for small bay assets.
For investors looking to capitalize on the small bay market, location is paramount. Small bay properties serve as homes for local trade and service-based businesses, small logistics companies, and light manufacturing operations. Their value and viability are closely tied to factors such as accessibility, transportation access, supply chain efficiency, regulatory compliance, and labor availability.
When evaluating small bay investment opportunities, investors should look for underperforming assets that can be improved through value-add strategies and active asset management. This approach can lead to stable, recurring income while offering opportunities for capital appreciation.
However, investing in small bay properties is not without risks. Downtime and vacancy are primary concerns, but these can be mitigated by selecting versatile spaces that appeal to a diverse tenant base. Active management, including regular property visits, frequent communication with property management companies, and attentive tenant relations, can help maintain high occupancy rates and tenant satisfaction.
As the industrial real estate landscape continues to evolve, small bay assets are emerging as a hidden gem for investors. Their ability to provide inflation protection, diversified tenant mix, and strong rent growth potential make them an attractive option in today's market. By carefully considering location factors, implementing value-add strategies, and maintaining active management, investors can potentially reap significant rewards from this often-overlooked segment of the industrial real estate market.
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