Small-Bay Industrial Real Estate: A High-Demand Asset Class in 2025

Small-bay industrial real estate has become one of the most resilient and compelling asset classes in commercial real estate. These properties, typically made up of units ranging from 2,500 to 15,000 square feet, serve a wide range of essential users including contractors, light manufacturers, e-commerce distributors, and quasi-retail operators. Their flexibility, accessibility, and utility make them a backbone of local economies.

In 2025, demand for small-bay industrial remains elevated, fueled by factors such as population growth, shifting consumer logistics, small business expansion, and the reshoring of domestic production. Yet supply remains structurally limited, creating strong fundamentals for investors. Combined with short lease durations, high tenant retention, and opportunities for value-add repositioning, this category continues to outperform many other segments of commercial real estate.

This article breaks down what defines small-bay industrial, where to find the strongest markets, who the end users are, and how investors are unlocking value through thoughtful improvements and active asset management.

Defining Small-Bay Industrial Properties

Small-bay industrial properties are versatile spaces designed to accommodate a variety of business operations. Key features and amenities include:

Unit Sizes: Typically ranging from 2,500 to 15,000 square feet, allowing for flexibility in tenant occupancy.
Clear Heights: Generally between 14 to 24 feet, suitable for light manufacturing and storage needs.
Roll-Up Doors: Equipped with roll-up or coiling doors to facilitate efficient loading and unloading.
Parking Ratios: Offering 1 to 2 parking spaces per 1,000 square feet, accommodating employee and light commercial vehicle parking.
Office-to-Warehouse Ratio: Typically featuring around 10–15% office space to support administrative functions without compromising warehouse utility. These spaces often include a private or shared bathroom, providing added convenience for tenants.
Layouts: Single story with flexible interior configurations, these spaces often feature mezzanine areas for additional storage.
Zoning and Location: Typically situated in areas with flexible zoning regulations that allow for a mix of industrial and quasi-retail uses. They are often located near suburban and urban centers to facilitate last-mile shipping and provide easy access to homes and businesses.
Show Rooms: When located on high-traffic streets, these spaces may include a showroom to display products and engage with customers.
Yard Space: While not always available, dedicated yard space is a highly desirable amenity for small-bay tenants. It can be used for secure equipment storage, vehicle parking, or additional operational needs.
Security and Gates: Many small-bay industrial properties include security measures such as gated access, perimeter fencing, and surveillance systems to protect tenants’ valuable equipment and materials.
Sprinklers: In buildings located next to urban centers, sprinklers are often a key feature to adhere to local building codes.

Supply Constraints and Market Metrics

While local market characteristics can help identify strong investment targets, broader national trends highlight the systemic undersupply of small-bay industrial product across the U.S. These structural limitations underpin the asset class’s durability and pricing power:

Chronic Undersupply: Only about 23 million square feet of small-bay industrial space is currently under construction nationwide, representing less than 0.3% of the existing inventory. Developers often favor large-format industrial projects, leaving this segment underserved.
Loss of Legacy Stock: Over the past decade, more than 115 million square feet of industrial space under 50,000 square feet has been demolished, frequently replaced by residential or big-box retail development. This loss has further tightened availability in urban and infill locations.
Exceptionally Low Vacancy: National vacancy rates for small-bay industrial hover around 3.4%, compared to much higher rates in the broader industrial sector. In many metro areas, rates are even lower, reflecting both demand strength and limited supply.
Sustained Rent Growth: With steady tenant demand and short lease durations, small-bay properties have posted outsized rent gains. Their scarcity has enabled landlords to push rents while maintaining occupancy.

This national supply imbalance, when combined with favorable local market indicators, creates a compelling backdrop for long-term investment in small-bay industrial assets.

Identifying Markets Prime for Small-Bay Industrial Investment

Investors aiming to capitalize on the growing demand for small-bay industrial properties should consider markets exhibiting specific demographic and economic characteristics. The following factors are strong indicators of robust demand for small-bay industrial spaces:

Population Growth: Regions experiencing significant population increases often see a corresponding rise in demand for local services, including tradespeople and contractors who utilize small-bay industrial spaces for operations and storage.
High Homeownership Rates: Areas with elevated homeownership percentages tend to have increased demand for home maintenance and improvement services, driving the need for small-bay industrial spaces by service-oriented businesses.
Higher Average Household Income: Markets with greater average household incomes typically exhibit higher consumer spending power, supporting a diverse range of businesses that occupy small-bay industrial properties.
Prevalence of Homeowners Associations (HOAs): In communities with strict HOA regulations, operating businesses from residential properties is often restricted, prompting contractors and small businesses to seek commercial spaces like small-bay industrial units.
Low Vacancy Rates: Markets with low vacancy rates for small-bay industrial properties indicate strong demand and limited supply, making them attractive for investment.
Limited New Construction: Areas with minimal new development of small-bay industrial spaces suggest a supply constraint, which can lead to increased rental rates and property values over time.
Number of Businesses: The count of small businesses within a 3, 5, and 10-mile radius provides insight into local demand for operational space.

By focusing on markets that exhibit these characteristics, investors can identify opportunities where small-bay industrial properties are likely to experience sustained demand and offer favorable returns.

Users of Small-Bay Industrial Spaces

Small-bay industrial properties attract a diverse range of tenants due to their flexibility, affordability, and strategic locations. Common user types include:

Contractors and Tradespeople: Tenants in this category typically use the space for equipment storage, dispatch operations, and administrative tasks. Common users include:
- HVAC, plumbing, and electrical contractors
- Roofing and general construction companies
- Landscaping, pool, pest control, and other home service providers
Light Manufacturing and Fabrication: These users engage in production or assembly activities that do not require heavy infrastructure. Typical businesses include:
- Custom cabinetry and woodworking
- Stone and countertop fabrication
- Metalworking and welding shops
- 3D printing, signage, and prototyping companies
Automotive Services: Small-bay units are ideal for auto-related users due to high ceilings and roll-up access. Examples include:
- Auto repair and maintenance shops
- Car detailing, paint, and wrap services
- Tire and parts sales and installation
Fitness and Recreational Facilities: The open layout and clear heights make these spaces suitable for recreational use. Common tenants include:
- CrossFit and functional fitness gyms
- Martial arts, dance, and boxing studios
- Indoor batting cages or sports training centers
Quasi-Retail and Consumer-Facing Businesses: These users blend showroom and warehouse functions, often benefiting from higher-visibility locations. Examples include:
- Breweries and distilleries with on-site tasting rooms
- Furniture or home improvement showrooms
- Art studios and creative workshops
- Pet daycare and grooming facilities
E-commerce and Distribution: Proximity to population centers makes small-bay units attractive for last-mile logistics. Common uses include:
- Local e-commerce order fulfillment
- Third-party logistics (3PL) providers
- Micro-warehousing and inventory overflow
Creative and Professional Services: Some tenants use these spaces as hybrid office-production environments. Common examples:
- Photography, film, or podcast studios
- R&D labs and tech fabrication
- Tech startups requiring flexible, low-cost space
Hobbyists and Collectors: Some personal hobbies and collections require more space, accessibility, or customization than traditional self-storage can offer:
- Antique or classic car storage and maintenance
- Boat and RV storage with drive-in access
- Personalized “man caves,” game rooms, or creative workshop spaces

Value-Add Strategies and Repositioning Levers

Small-bay industrial properties offer meaningful opportunities for repositioning and value enhancement. Whether through physical upgrades or operational improvements, investors can significantly improve both rent roll quality and asset value. Unlike traditional warehouse investments, small-bay assets are often multi-tenant and highly visible, which makes curb appeal and functionality especially important. Remember that business owners and their employees go to work there every day, and the look and feel of the space impacts leasing and retention.

Building Improvements:

Exterior Upgrades: Refreshing facades, adding modern paint schemes, and improving lighting can transform the perception of older buildings. Replacing old roll-up doors or worn exterior finishes can help attract a higher-quality tenant base.
Parking Lot Resurfacing: Milling and resurfacing parking lots or driveways can dramatically improve first impressions and vehicle functionality.
Retail-Ready Features: Installing glass storefronts or creating showroom areas can convert standard bays into quasi-retail or consumer-facing spaces, unlocking premium rents.
Office-to-Warehouse Conversions: Many older small-bay assets have excess office space. Converting surplus office back into warehouse or open shop floor space can increase usability and rent per square foot.
Mezzanine Additions: Adding mezzanine levels for storage or light assembly can increase usable square footage and add value without expanding the building footprint.
Bathroom Additions: Installing private bathrooms in individual units, especially in multi-tenant layouts, improves tenant satisfaction and operational independence.
Landscaping and Curb Appeal: Simple enhancements like clean fencing, manicured landscaping, and tree planting can make the property more inviting.
Gates and Security Systems: Gated access, surveillance cameras, and alarm systems not only improve safety but can also justify higher rents or appeal to more risk-sensitive users.
Signage and Visibility: Upgraded monument signs, address markers, and directional signage help both navigation and branding, which is especially important for retail-adjacent users.

Operational Improvements:

Mark-to-Market Rent Adjustments: Many small-bay assets trade with below-market leases. Bringing existing tenants up to current rental rates at renewal or re-tenanting time is a core value creation lever.
Tenant Mix Optimization: Removing environmentally risky or incompatible tenants (e.g., chemical storage, heavy auto work) can improve the overall asset profile and appeal to a broader tenant base.
Expense Recovery Structure: Converting tenants to NNN or NN leases allows owners to recover property taxes, insurance, and common area maintenance, improving NOI and stabilizing operating margins.

Together, these levers make small-bay industrial not only a stable income-producing investment but also a viable repositioning play. Properties with deferred maintenance, legacy tenant mixes, or outdated layouts are often ripe for creative improvements that deliver real yield growth.

Challenges and Risks in Small-Bay Industrial Investment

While small-bay industrial real estate offers strong fundamentals and value-add potential, investors should be aware of the following operational and financial risks:

Non-Credit Tenants: Most tenants are local businesses or sole proprietors without formal credit ratings. They may walk away from leases with limited recourse, sometimes dissolving and reopening under new entities to avoid obligations.
Limited Lease Sophistication: Many tenants are unfamiliar with commercial lease terms such as CAM charges, expense reimbursements, and escalation clauses. This can lead to confusion or disputes unless terms are clearly communicated and managed.
Code Compliance and Costly Upgrades: Repositioning a property may trigger expensive building code requirements, especially in older structures. Common upgrades include:
- Installing or updating fire sprinkler systems
- ADA-compliant parking, entrances, or restrooms
- HVAC, electrical, or structural reviews that prompt broader city inspections
Environmental Exposure: Tenants involved in auto repair, chemical handling, or fabrication may introduce contamination risks. Sites with past or present high-risk uses may require Phase I or Phase II environmental studies, or even remediation.
Management Complexity: Multi-tenant layouts require more active management than single-tenant NNN assets. Common responsibilities include:
- Coordinating repairs and maintenance of shared areas
- Enforcing boundaries for parking and yard space
- Managing tenant mix to avoid nuisance or environmental conflicts
Zoning and Urbanization Risk: Infill and suburban locations may face rezoning pressure as areas gentrify or densify. Municipalities may restrict industrial use or rezone properties for residential or commercial redevelopment, affecting long-term utility or entitlements.

Mitigation Strategies

In addition to creating a robust real estate due diligence checklist, investors can reduce downside risk and protect returns in small-bay industrial by proactively addressing the most common operational and structural challenges:

Tenant Screening and Guarantees: Require personal guarantees, adequate security deposits, and strong references from new tenants to reduce exposure to lease defaults.
Lease Education and Clarity: Use simplified lease language and onboarding walkthroughs to ensure tenants understand reimbursement structures, renewal terms, and responsibilities.
Budget for Code Compliance: During acquisition, assume some level of required upgrades if repositioning is planned. Consult local code enforcement early to identify sprinkler, ADA, or HVAC standards that may be triggered.
Environmental Diligence: Conduct Phase I environmental assessments on all acquisitions, and consider Phase II studies or seller indemnities for properties with known or suspected high-risk users.
Active Property Management: Either hire an experienced third-party manager or maintain in-house oversight for leasing, maintenance coordination, and conflict resolution among tenants.
Zoning and Land Use Review: Evaluate the property’s zoning designation and its proximity to transitional or upzoning districts. Confirm compatibility for intended uses and longevity of industrial entitlements.
CapEx Reserves: Maintain a reserve fund for unforeseen expenses tied to deferred maintenance, compliance upgrades, or tenant turnover costs.

Investment Outlook

The outlook for small-bay industrial real estate remains highly favorable, with strong tailwinds driving both near-term performance and long-term growth. This asset class continues to outperform due to its essential user base, adaptable format, and scarcity in high-demand locations. Key advantages include:

Recession Resistance: A diverse mix of local service providers, trades, and light industrial users keeps occupancy levels consistently high. These are essential businesses that support day-to-day economic activity and tend to renew leases even in uncertain cycles.
Built-In Inflation Protection: With lease terms typically ranging from 1 to 3 years, landlords can adjust rental rates more frequently to keep pace with market conditions and inflation.
Compelling Value-Add Opportunities: Many small-bay properties offer upside through repositioning strategies such as rent optimization, capital improvements, tenant upgrades, or lease structure conversions. This makes the sector attractive for both core-plus and opportunistic investors.
Strong Institutional Momentum: Major real estate investment trusts (REITs), private equity platforms, and family offices are increasingly targeting small-bay industrial portfolios. This growing institutional demand reflects broad confidence in the sector’s fundamentals and long-term viability.

Conclusion

Small-bay industrial real estate stands out in 2025 as a resilient and high-performing asset class within the commercial real estate landscape. Its combination of strong demand drivers, limited supply, and robust financial metrics make it an attractive option for investors seeking stable returns and growth potential.

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