The Rise of Small Industrial Spaces: Why They’re in Higher Demand Than Big Box Spaces

In the industrial real estate industry, traditional big box spaces, which were the epitome of industrial development post COVID-19, are facing competition from a rising star: light industrial spaces (a.k.a., small bay warehouses, small industrial spaces, etc.). This trend isn’t just a blip on the radar; it’s a fundamental change driven by various economic, technological, and societal factors. Light industrial assets act as a facilitator for local distribution networks, provide a solution for excess inventory, and offer versatility to accommodate a wide range of tenant needs, especially in service-driven capacities that follow residential development.

Understanding Light Industrial Spaces

Light industrial assets are a vital sub-sector of industrial real estate that are generally below 200,000 square feet in size, with units ranging from 1,000 to 20,000 square feet. This segment has experienced a notable shift in occupancy patterns, driven by sustained demand from service-driven users who have been priced out of larger industrial spaces or who simply do not have a need for bulk capacity that is prevalent in larger industrial development. Demand has outstripped supply on small-bay warehouses as economies of scale on the development of larger assets encouraged an oversupply. At the same time, there was little to no inventory growth on smaller product. 

During the last two recessionary periods, the Great Financial Crisis and the Covid-19 Pandemic, the light industrial sector proved its resiliency and stability in the face of economic uncertainty. Within the sector, occupancy remained stable, and rent collections were in the top quartile relative to other property types. Key themes emerged during the pandemic, including a pronounced preference for smaller space requirements. 

  • Drivers of Change in Supply Chain Dynamics: : The upheaval introduced by the pandemic caused businesses to reevaluate their approach to product logistics, necessitating a blend of light industrial warehouse spaces alongside traditional brick-and-mortar establishments. The need for efficient supply chain management, coupled with consumer demands for expedited delivery, provides insight into the significance of light industrial warehouses in ensuring streamlined product movement. 
  • Service Based Industries and Population Growth: The increased population surge in certain MSAs in the Southeast was accompanied by a need for increased service-based businesses – HVAC, contractors, material supply companies, mechanics, and other vendors. These businesses “follow the rooftops.” 
  • The Shift to Onshoring: The resurgence of onshoring activities has created opportunities for smaller enterprises to contribute to the supply chain. This shift has led to increased demand for smaller warehouse spaces, driving rental rates upwards and potentially augmenting property values, especially when complemented by infrastructure enhancements and economic development initiatives like the 2022 CHIPs Act. 
  • Technology Advancements: The industrial landscape is undergoing a rapid digital transformation, with companies leveraging innovative technologies to enhance manufacturing efficiency. Technologies such as 3D printing and advanced inventory management systems are revolutionizing traditional processes, enabling higher productivity within a reduced spatial footprint. This convergence underscores the pivotal role of digitization in reshaping industrial and logistics operations. 

Meeting the Surge in Demand

The availability of light industrial spaces remains constrained in key markets nationwide, with leasing activities propelled by sustained demand resulting from secular shifts in industrial tenancy. With small warehouses in high demand, the light industrial spaces are highly sought after, with availability rates significantly below the national average. To put it into perspective, according to CoStar, warehouse and distribution units under 10,000 square feet are at a 3.5% availability rate, 270 basis points below the U.S. industrial market average. 

Despite heightened demand, the development of light industrial warehouse space has remained low, accounting only for a small fraction of the total industrial inventory. As of the end of 2023, only 4% of space currently underway falls in the small bay segment, even as this space makes up over 36% of the total U.S. industrial inventory. 

As a result of limited supply and high demand, time on the market has dwindled considerably. As of 2023, time on the market for small bay space sits at a record low of just 4 months, 48% less compared to the average time between 2010 and 2022.  

Looking Ahead

The sustained demand for light industrial assets is expected to persist as companies and logistics operators expand their networks to enhance proximity to consumers. The momentum is sustained by favorable economic conditions, the need for supply chain efficiency, population migration, the trend toward onshoring, and technology innovation in the United States. As businesses continue to adapt to changing market dynamics, small industrial spaces stand out as a strategic asset in navigating the evolving landscape of industrial real estate.