Small-Bay Industrial Emerges As CRE’s Most Resilient Asset Class

As commercial real estate continues to navigate economic uncertainty, light industrial — particularly the small-bay segment — is proving to be one of the market’s strongest and most resilient asset classes, according to a new report from BKM Capital Partners.

The firm’s Q1 2026 Light Industrial Market Update highlighted a growing divide between small-bay and large-format industrial properties across nearly every major performance metric, including availability, rental growth, leasing activity, and investor demand.

“Multi-tenant light industrial properties continue to outperform larger warehouse product across nearly every key metric,” BKM noted in the report. “Demand remains firmly concentrated in the small-bay segment, where tenants prioritize flexibility, infill locations, and operational efficiency.”

Investor appetite for the sector remains strong. Industrial transactions under $100 million accounted for 73% of total industrial sales volume in 2025, significantly above the historical average of 62%. Overall industrial sales volume climbed 11% year-over-year to $91.3 billion. The report also pointed to increasing consolidation within the sector as newer entrants discovered that managing small-bay assets requires a very different operational strategy than traditional bulk industrial properties.

“As the cycle has tightened, the gap between disciplined operators and recent entrants has become impossible to ignore, and consolidation became the natural outcome,” said Brian Malliet.

Facilities under 100,000 square feet continue to outperform larger industrial buildings in both occupancy and leasing activity. Average vacancy for buildings below 100,000 square feet stood at just 4.9% — roughly half the vacancy rate of larger facilities. At the same time, supply remains constrained, with only 7% of new industrial developments under construction measuring below 50,000 square feet.

BKM also highlighted the rise of “HALO” businesses — Heavy Asset, Low Obsolescence companies — as a major driver of long-term demand for light industrial space. These businesses include electrical contractors, HVAC operators, and specialty manufacturers that require flexible, functional facilities close to population centers.

“These HALO businesses reinforce a core demand driver of multi-tenant light industrial by increasing the need for highly functional space,” the report stated.

Additional fundamentals continue to support investor interest in the sector. Properties under 150,000 square feet are generating a 21% rent premium over larger industrial assets, while leases below 50,000 square feet represented 80% of all industrial leasing activity during Q4 2025. Net absorption reached 62 million square feet nationwide, led by markets such as Dallas-Fort Worth, Houston, and Phoenix.

Technology-driven shifts in the economy are also accelerating demand for smaller industrial footprints. Innovations such as 3D printing are reducing labor needs, simplifying production processes, and lowering operational costs, allowing companies to operate more efficiently within smaller spaces.

“As a result, demand for small-bay industrial product continues to grow, particularly among technology-driven manufacturers, logistics users, and light production tenants seeking scalable infill space,” the report noted.

Looking ahead, BKM expects emerging technologies such as AI-powered micro-fulfillment centers to further increase demand for small-bay industrial properties through expanded infill supply chain networks. Growth in domestic manufacturing employment is also expected to support demand for smaller facilities located near major production hubs.

While BKM believes demand for larger industrial assets could improve as new supply slows, the firm expects small-bay industrial to remain one of the strongest-performing sectors in commercial real estate.

“Light industrial is CRE’s latest gold rush — and it’s here to stay,” the report concluded.

Source: GlobeSt