Leasing remains resilient for small bay industrial space

 By Juan Arias CoStar Analytics

Despite industrial leasing performance slowing across all property-size ranges, the small bay segment of the market, typically catering to tenants occupying less than 10,000 square feet, has maintained lower availability and higher rent gains in the past few quarters than its larger counterparts.

This has been driven by limited supply additions and elevated demolition levels of smaller industrial properties. On average, for every 100 square feet of small bay space added to the market, 30 square feet is demolished.

This market segment also has a larger and more liquid tenant demand base, with 1,000 to 10,000 square foot tenants accounting for over 60% of new lease activity annually since 2010. In contrast, industrial tenants in the 10,000 to 25,000 range represent an additional 24% of new leasing activity and those in the 25,000 to 50,000 square foot range account for just 10% of new leasing activity.

Combined, these smaller tenants account for over 90% of leasing activity in any given market, making larger logistics leases of over 50,000 square feet a rarity under normal economic conditions.

Apart from having a more even balance between supply and demand, the small bay industrial sector has also experienced more leasing activity since 2023. New lease activity, specifically for spaces below 10,000 square feet, bottomed out in early 2023 and has climbed higher since. Today, activity for this segment is only 5% below recent highs seen in 2019, as shown by the chart above.

Lease activity for 10,000- to 50,000-square-foot tenants has also remained more consistent, at about 80% to 85% of recent highs. While activity for these small bay tenants appears to be holding up, larger tenants have seen a continuous deterioration in leasing.

New lease transactions for industrial spaces measuring 50,000 to 100,000 square feet have fallen 25% from recent highs, and new leases for larger spaces of over 100,000 square feet have dropped 30%.

Asking rents have also performed better for smaller industrial lease sizes in recent months. Spaces under 10,000 square feet saw asking rents for triple-net leases, those that typically include payment of insurance, taxes and maintenance, climb to all-time highs in June of this year to over $13.50 per square foot. Asking rents for 10,000- to 25,000-square-foot spaces also reached new highs in July at over $11.80 per square foot, on a triple-net basis that's often referred to as NNN.

In contrast, all other larger lease sizes have seen lower asking rents after reaching cyclical highs in 2024, for leases of 25,000 to 50,000 square feet, while asking rents for larger-lease segments have declined since 2023.

That said, in the longer run, since 2019, the larger segments have generally seen stronger asking rent appreciation as newly completed properties leased up. However, the momentum in driving rent growth from leases signed in new properties is now well in the rearview mirror.

In fact, new construction has continued to see higher availability rates in the last few months, with the exception of the largest properties, over 500,000 square feet.

While this largest property segment has maintained a closer balance between supply and demand, and typically has a higher percentage of build-to-suits, the same is not the case for mid-sized industrial properties, those measuring between 100,000 and 500,000 square feet as well as those between 50,000 to 100,000 square feet. These size cohorts have seen an elevated supply wave in the past few years, catering to tenants with similar size requirements. However, tenants in these size ranges have become much less active today.

Industrial properties under 50,000 square feet have also seen space availability increase in new construction, as small bay tenant requirements are not as cut-and-dried as those of larger tenants. Small bay tenants tend to have a stronger preference for proximity to their end-consumer, which is highly dependent on local market dynamics. These consumers can be a high-density residential area, a manufacturing hub or a data center hub, just to name a few.

Also, small-bay tenants tend to place less of a priority on ceiling heights as their business is typically less reliant on warehousing inventory. Therefore, newer properties with elevated clear heights may not appear as attractive to small bay industrial users.

Since 2010, newer small bay properties have, on average, been built 13 miles or more from a city’s central business district, or CBD. However, they have gradually become less competitive relative to older infill properties located closer to the CBD. Although these infill properties may be much older, their proximity to end consumers, which helps tenants save on transportation costs, is an amenity that newly constructed small bay properties cannot easily replicate.

In fact, while properties built within an eight-mile radius of the CBD tend to be of 1960s to 1980s vintage, these tend to have an availability rate that is one percentage point lower than their newer counterparts located 14 miles away from the CBD.

Even so, local market dynamics can vary widely, and distinct regional factors may be contributing to the stronger performance of small bay properties in certain areas.

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