REAL ESTATE NEWS

At a time of uncertainty when commercial real estate is still struggling to find firm footing, light industrial – especially the small-bay segment -- remains one of the most fundamentally sound and operationally resilient asset classes in the market, according to a new report from BKM Capital Partners.

The report emphasized the widening gap between small-bay and large industrial product in many areas -- from availability and rental growth to leasing demand and investor interest.

"Multi-tenant light industrial properties continue to outperform larger warehouse product across nearly every key metric—from availability and rental growth to leasing demand and investor interest," BKM stated in its Q1 2026 Light Industrial Market Update.

"Demand remains firmly concentrated in the small-bay segment, where tenants continue to prioritize flexibility, infill proximity, and operational efficiency."

Transactions under $100 million represented 73% of total industrial sales in 2025, well above the long-term average of 62%, as capital flowed in. Industrial sales volume surged 11% year-over-year to $91.3 billion.

Also, mergers and acquisitions picked up as some new entrants into the small-bay market discovered that its operational profile was different from bulk industrial, noted Brian Malliet, founder and CEO of BKM.

"As the cycle has tightened, the gap between disciplined operators and recent entrants has become hard to ignore, and consolidation was the natural result," Malliet said.

The report noted that facilities under 100,000 square feet have less availability and higher leasing rates than their bigger rivals -- but supply and new construction are limited. The 4.9% average vacancy for buildings under 100K square feet was half the rate for buildings over that limit. Just 7% of new buildings under construction had less than 50,000 square feet.

BKM also cited a shift in the U.S. economy toward HALO businesses -- Heavy Asset, Low Obsolescence companies that enhance the prospects for light industrial real estate and have attracted significant investment. Some examples are electrical contractors, HVAC services and specialty manufacturers.

"These HALO businesses reinforce a core demand driver of multi-tenant light industrial, increasing the need for functional space," the report said.

BKM also highlighted other factors that it said contribute to the promise of the small-bay sector for investors. It cited a 21% rate premium for properties under 150,000 square feet compared to larger ones. Leases under 50,000 square feet accounted for 80% of all industrial leasing activity in Q4 2025. The quarter also saw 62 million square feet of net absorption nationwide – especially in cities like Dallas-Fort Worth, Houston and Phoenix.

Changes in the makeup of the economy, as technology has evolved, have played another big role in driving demand for light industrial space. E-commerce is one example, along with others.

"Technologies such as 3D printing reduce labor requirements, eliminate complex assembly processes, and lower setup costs, allowing businesses to operate within smaller, more adaptable footprints," the report commented.

"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."

Other changes will be brought about by AI-enabled micro-fulfillment centers that are expected to drive demand for small-bay product through extensive infill supply chain networks. Plus, demand is anticipated to come from the expansion of manufacturing employment for smaller industrial facilities near major manufacturing hubs.

At the same time, BKM sees prospects for increased demand for larger industrial facilities this year as supply falls, while levels for smaller spaces remain strong.

"Light industrial is CRE's latest goldrush – and it's here to stay," the report predicted.

Source: GlobeSt/ALM