CREI Market Insights

Small bay, big play — the rising star of the industrial sector

June 2025 | 8 min read

Since the pandemic, industrial real estate has thrived, attracting significant institutional investment and benefiting from substantial capital inflows. Large bulk distribution properties emerged as early winners in the post-Covid era due to their critical role in logistics and potential for long-term leases with well-known credit tenants. However, the nationwide surge in new supply has led to higher vacancy rates, especially in these larger, often single-tenant demised properties.

Developers, riding the pandemic-induced logistics boom, appear to have overestimated the demand for such assets as large companies like Amazon scaled back leasing and acquisitions. As a result, vacancy in assets over 150,000 square feet today is now nearly double that of the smaller industrial properties where demand remains strong. The individual suites within these smaller properties - specifically those under 50,000 square feet - have also seen rents grow by over 40% since 2020, compared to around 30% for the broader market. These and other market dynamics today give small bay light industrial advantages over other sectors and position the sub-class as one of the most compelling real estate investment opportunities in 2025.

Key takeaways

Shallow bay light industrial is a compelling investment opportunity, benefiting from persistent demand, supply constraints, and strong fundamentals.
Industrial properties under 150,000 square feet show a vacancy of 4.8%, nearly half the rate of large-format industrial assets.
Limited new construction is exacerbating supply shortages, with light industrial under construction representing just 0.5% of existing industrial stock.
More institutional capital is shifting towards shallow bay portfolios, signaling growing investor conviction in the space.
Regional trends favor the Sun Belt and Midwest markets, with population growth driving rents in the Sun Belt.
Investment advantages include a diverse tenant base, higher demand, discount to replacement cost, inflation protection, valueadd opportunities, and strong yield potential.

Market dynamics for small bay industrial properties

Demand and scarcity

An examination of U.S. industrial markets reveals that the strongest demand in today’s market is concentrated in smaller, multi-tenant, infill industrial and warehouse properties. These assets tend to cater to a diverse range of businesses making them more resilient to economic downturns. While large firms can consolidate and reduce their real estate footprint in uncertain times, smaller businesses do not have the luxury of forgoing the essential space required for daily operations.

Moreover, employment in industries that heavily rely on small bay properties such as construction and wholesale trade has outpaced the available inventory. Small businesses, the primary tenant base for this asset class, have also benefited in recent years from supportive government programs and more accessible bank lending standards.

Exhibit 1:

Cumulative growth of small bay industrial stock and key industry employment

Source: St. Louis Federal Reserve, CoStar

Compounding this demand surge is a significant supply constraint. Rising construction costs following the pandemic have made new light industrial development largely cost-prohibitive, further tightening availability. The new warehouse construction cost index shows a 44% increase in development costs from the beginning of pandemic to today. The 90 million square feet of small bay industrial space currently under construction nationwide represents just 0.5% of existing stock, a figure that has continued to decline since interest rates moved off historic lows in early 2022.

Exhibit 2:

New warehouse construction cost index

Source: St. Louis Federal Reserve

“Industrial construction projects of all stripes are significantly more expensive to build now than in previous years. Costs remained stable by YE 2024, yet a variety of headwinds including rebuilding efforts after devastating California wildfires, tariff uncertainty, and immigration policies could cause costs to stay elevated or move up in the short to mid term” - Newmark Research

Higher occupancy rates in small bay buildings

While there is a clear trend of elevated vacancy rates among larger properties, the overarching theme is demonstrably stronger demand for smaller, largely multi-tenant, industrial space. In 2024, the average lease size declined 7.7% to approximately 68,000 square feet. As illustrated in the chart below, although smaller properties represent most of the industrial inventory in the United States, it is large-format properties that account for the lion’s share of vacant square footage today.

Exhibit 3:

Industrial inventory and vacancy by size segment

Source: Costar

Geographical hotspots and market expansion

2024 industrial leasing data from CoStar reveals that while rent growth in the 10 highest-rent industrial markets has begun to plateau, demand remains strong in the remaining 50 major U.S. metro areas. Light industrial suites under 50,000 square feet saw rents rise just 1.6% in the 10 most expensive metros (markets like Los Angeles, San Diego, the East Bay, New York/Northern NJ, Seattle, and South Florida) but grew by more than triple that rate (5.9%) across the next 50 largest markets. This indicates that, apart from a few of the most expensive markets, light industrial tenants nationwide have continued to absorb large rent increases in tight market conditions.

Sun Belt and Midwest markets in particular have seen rents continue to climb. Strong population and business growth in the Sunbelt has driven small bay demand from contractors, as well as businesses like building supply, auto supply, and other supply/service-oriented businesses that either expand or originate to meet the needs of a growing population base. While not experiencing the same population surge, the Midwest markets have seen industrial rents grow primarily from a lack of new development, with this low growth previously deterring developers and now benefiting existing assets.

Benefits of investing in small bay industrial properties

Investors have taken notice of the favorable fundamentals in the space, and portfolios of smaller light industrial properties that previously may have fallen under the radar of major institutional players are now in vogue. Transactions of light industrial properties under 150,000 square feet accounted for 62% of industrial transaction volume in 2024, up from 58% in 2023, and 20% of this light industrial volume last year was attributed to institutional buyers, up from 16% in 2023. These fundamentals provide sophisticated investors with significant opportunities for upside potential.

Key advantages include:

1. Large diverse tenant base – Smaller industrial properties benefit from an inherently wider, more versatile tenant pool than larger bulk distribution product. The 34.8 million small businesses in the U.S. - defined as those with fewer than 500 employees - represent 99% of all firms, 46% of private sector employees, and 61% of net new job creation since 1995. This sheer variety of tenants helps insure against the industry concentration risk facing assets with a more limited tenant base. Multi-tenant properties also offer the flexibility for small businesses to expand or contract in-place with minimal friction costs, which can improve tenant retention as firms evolve over time.

2. Higher demand due to less availability – Infill light industrial buildings, those in and around urban markets, have experienced net destruction for much of the past few decades, as urban markets repurpose industrial land for multifamily and other mixed-use projects. As seen in the chart below, 2023 was the first year since 2010 that deliveries of infill light industrial space exceeded the square footage demolished over the same period. With few smaller spaces available in the market, tenants, especially those that require adaptable and/or customizable space solutions, have limited options for relocation in many of the major metros across the country.

3. Discount to replacement costs – Development costs for new small bay light industrial projects remain prohibitively high in most U.S. markets, with required market rents for an economical yield on a new development typically exceeding the current class B rents. This dynamic continues to shield much of the small bay industrial market from the risk of any supply glut.

4. Inflation protection – Lower weighted average lease terms (WALT) for light industrial properties allow owners to frequently mark-to-market rents in response to shifting market conditions, providing a degree of inflation protection. Multiple tenant suites can also smooth the overall effect of lease turnover on cashflows. Light industrial leases are also “triple net” and as such the tenants are responsible for the majority of the operating expenses of the asset, including taxes and insurance, allowing owners to increase NOI margins when leases are marked-to-market providing another measure of inflation protection.

5. Value-add opportunities – Light industrial properties can offer capital investment-light upgrades when compared to their larger counterparts, providing easier avenues to reposition assets and justify rent increases. Fragmented non-institutional ownership common at these types of properties often leads to deferred maintenance issues easily remedied by savvy investors.

6. Potential for higher yields – The rise in demand coupled with limited availability, shorter WALT, and cost-efficient value-add upgrades can make small bay industrial buildings highly profitable. Smaller units usually have fewer extensive infrastructure requirements, which also helps keep maintenance and operational expenses manageable. These factors coupled with recent rent expansion could lead to attractive exit opportunities, particularly in portfolio aggregation strategies.

Exhibit 4:

Industrial inventory and vacancy by size segment:
Demolished and net delivered light industrial in infill markets

Source: Costar

Risks and considerations

While the outlook for small bay industrial assets remains compelling, there are several risks that merit consideration. This subsector of industrial often require more intensive asset management due to high numbers of tenants, frequent lease turnover, and smaller lease sizes, which can drive up operating expenses. Additionally, leasing to small or mid-size non-credit tenants can always present a degree non-payment risk, as these tenants can be more vulnerable to economic volatility and might not have the balance sheet of larger firms. New tariff policy from the White House also has the potential to disrupt operations for many industrial tenants whose businesses rely on imports. Finally, market liquidity can vary significantly by region and buyer appetite, particularly in secondary or tertiary markets, which could impact exit strategies. A disciplined approach to location selection, underwriting, and active management is essential to mitigating these risks and unlocking value.

Conclusion

In a market where institutional capital has historically focused on large-scale distribution centers, small bay industrial properties offer a unique blend of stability, rent growth potential, and operational flexibility. Despite record levels of overall industrial development, the small bay sub-class remains significantly undersupplied with projects currently under construction representing just 0.5% of existing stock. The undersupply is reflected in the vacancy trends, with smaller properties below 150,000 square feet showing half the vacancy of their larger format counterparts today. As leasing demand continues to outpace supply in this segment, investors positioned in small bay industrial assets stand to capture sustained NOI growth and outsized total returns in 2025 and beyond.

For further information, contact:

David Warshawsky
Managing Director, Capital Markets
david.warshawsky@corebridgefinancial.com

Guthrie Stanback
Senior Associate, Research
guthrie.stanback@corebridgefinancial.com

This material is general in nature, was developed for educational use only, and is not intended to provide financial, legal, fiduciary, accounting or tax advice, nor is it intended to make any recommendations or investment advice. Applicable laws and regulations are complex and subject to change. Please consult with your financial professional regarding your situation. For legal, accounting or tax advice, consult the appropriate professional. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Past performance is no guarantee of future results.

Investing involves risk, including the possible loss of principal.

This material is provided by Corebridge Real Estate Investors (“CREI”), a brand name for the real estate equity investment management division of Corebridge Financial, Inc., an American multinational financial services company that provides annuities, life insurance, asset management, retirement solutions, and other services. CREI includes real estate equity management provided by Corebridge Institutional Investments (U.S.), LLC, a registered investment adviser with the U.S. Securities Exchange Commission that provides asset management services to affiliated and unaffiliated institutional clients, and private funds and private investments sponsored by or formed under Corebridge Real Estate Investors Inc. – a Related Person of the Adviser.