Investors Flock To Small-Bay Industrial As AI, E-Commerce Reshape Demand

As the industrial real estate market finds its footing after years of disruption, capital is beginning to return—but selectively. Investment activity is reemerging first in small-bay industrial, signaling early price discovery for the next stage of the cycle, according to BKM Capital Partners’ Q4 Light Industrial Market Update.

Institutional investors are gravitating toward small-bay assets ahead of a broader industrial recovery, drawn by stronger income visibility, resilient demand, and more straightforward underwriting. Transaction data reflects this momentum: small-bay industrial posted roughly $2.2 billion in sales volume in Q3 2025, underscoring renewed institutional confidence following the sector’s valuation low in late 2023.

Pricing trends further highlight the shift. Buildings under 100,000 square feet saw average sale prices rise 10.6% year over year, well ahead of the 3.5% increase recorded by larger properties. Overall market liquidity climbed 16%, with transactions under $100 million representing 70% of total deal volume over the past four quarters.

Fundamentals continue to favor smaller assets. Vacancy rates for buildings under 100,000 square feet are about half those of larger facilities, while new supply remains constrained—less than 1% of small-bay inventory is currently under construction, compared with more than 3% for large-format industrial. Leasing demand is strongest for units under 50,000 square feet, supporting higher occupancy and wider leasing spreads.

Technology trends are amplifying these dynamics. Warehouse automation is expected to expand from $25 billion in 2024 to $54 billion by 2029, while AI-enabled logistics are shrinking space needs—particularly in last-mile locations—by improving efficiency, site selection, and absorption. AI-powered e-commerce could represent 25% of global online sales by 2030, up from about 5% today, intensifying demand for infill and last-mile industrial properties.

Third-party logistics, logistics, and distribution users remain the dominant leasing drivers, generating 254% more activity than the next four largest sectors combined. In Q3, 3PL users accounted for 20% of all leases. Looking ahead, holiday retail sales are projected to exceed $1 trillion in 2025, with 20% to 25% occurring online. By 2026, e-commerce users are expected to represent roughly a quarter of new leasing activity as global online sales approach 20% of total retail spending.

“What stands out right now is not just demand, but where liquidity is actually returning first,” said Brian Malliet, chief investment officer at BKM Capital Partners. “As valuations stabilize, capital is reengaging most decisively in small-bay industrial because the fundamentals are easier to underwrite and the income story is clearer. In today’s market, conviction—not leverage—is driving investment decisions.”

Source: GlobeSt