Small bay warehouses have traditionally been considered one of the less important segments of industrial real estate
“However, this perspective is shifting as demand for small storage spaces remains high, while supply is limited and the cost of new construction continues to rise,” according to Alex Redfearn, CEO of Redfearn Capital, a private equity CRE firm based in Delray Beach.
So, what exactly is a small bay? Definitions vary, but for Redfearn, small bays are industrial spaces ranging from 2,500 to 5,000 square feet, typically located within larger buildings. About 15% of the space is office area, while the remaining portion is dedicated to industrial use. These units are often found in infill locations within major metro areas.
“In Florida, for instance, they can be found in markets like Miami, Tampa, Orlando, Jacksonville, Broward County, and Palm Beach,” Redfearn shared with GlobeSt.com.
Small bays are sometimes referred to as “last mile facilities” because they allow products to be quickly delivered to end users. In fact, even Amazon has opened more than 1,000 of these smaller facilities to expedite delivery times.
Some definitions classify small bays as warehouses between 5,000 and 15,000 square feet, while others, like CoStar, set the upper limit at 50,000 square feet. Newmark, on the other hand, defines them as warehouses under 100,000 square feet with multiple tenants. Typical tenants in these spaces may include HVAC contractors, service providers such as plumbers and electricians, light manufacturing businesses, and small, local companies.
From an investor’s perspective, small bay properties have notable advantages. They attract a wide variety of tenants, typically on short leases of three to five years, allowing landlords the flexibility to adjust rents frequently and providing some inflation protection. However, this setup also means landlords must carefully vet tenants to avoid high turnover and assess credit risk to ensure stability.
“You want some tenants to be a little sticky,” Redfearn emphasized. “The low vacancy rates in small bay spaces are also attracting investor interest. In Southern Florida, vacancy rates for properties under 10,000 square feet are under 5%.”
A March 2024 CoStar report found that in the 20 tightest markets in the U.S., the availability rate for properties under 50,000 square feet ranged from 5.1% in Las Vegas to just 1.6% in Louisville. The median time to lease spaces under 10,000 square feet ranged from 1.5 to 3.5 months. Redfearn attributes the scarcity of small bay warehouses to the increasing cost of construction, which makes building new smaller warehouses expensive. As a result, new developments are rare, creating high demand for existing facilities.
“Small bay industrial is a much tighter market than bulk distribution,” stated Newmark’s 1Q 2024 report on the U.S. industrial market.