The Growing Shortage of Small-Bay Industrial Space

Limited availability, high competition, and rising rental rates make small industrial properties an interesting investment strategy for private & institutional investors alike.

Photo from QualityWarehouse.com

By Michael Plasencia

WREV

February 18, 2025

Limited Supply and Rising Demand

The scarcity of small warehouse space is becoming a significant challenge for businesses across the United States. While large-scale distribution centers have dominated new development projects, the supply of warehouses under 100,000 square feet has remained level and, in some cases, even declined as small warehouses get demolished to make way for larger ones. The vacancy rate for these properties is 3.9% nationally, significantly lower than the overall industrial vacancy rate of 6.7% (WSJ). This imbalance has led to sustained rent growth, reinforcing strong market fundamentals for well-located small-bay industrial properties.

Developer Priorities and Market Constraints

Developers have largely focused on constructing large-scale warehouses designed for major e-commerce and distribution operations. In contrast, small warehouses, often found in urban and suburban areas, have seen far less new development given zoning regulations, higher land costs, and limited scalability. About 8% of the new warehouses built last year were less than 100,000 square feet, according to Cushman & Wakefield, and this has created a growing supply gap, particularly for small and regional businesses looking for less than 50,000 SF.

As Jackson Oliver, head of logistics and industrial real estate at Cushman puts it, “There’s not been virtually any new development in those smaller size segments...Just economies of scale and deal economics, developers are targeting those bigger boxes to maximize their return profiles.”

Rising Costs and Competitive Pressures

The increasing competition for small industrial space has contributed to record-high rental rates nationwide. The tight supply has driven average asking rents for national industrial space to $9.59 per square foot in the second quarter of 2024, a 16.1% increase from the previous year. As businesses continue to compete for limited warehouse space, the market is experiencing sustained upward pressure on rents, solidifying the long-term value of well-positioned small industrial properties.

A Strategic Opportunity

The structural undersupply of small warehouses, coupled with ongoing demand, presents a compelling case for strategic investment. Industrial real estate fundamentals remain strong for smaller infill industrial properties, and it continues to be a focus at WREV.

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For further reading on market trends and insights, visit WSJ.