Small bay warehouses are often viewed as one of the less important segments of industrial real estate. But that view is changing as demand for small space storage remains high while supply is limited and the high cost of replacement keeps rising, according to Alex Redfearn, CEO of Redfearn Capital, a private equity CRE firm in Delray Beach, FL.
What is a small bay? There appear to be many definitions. For Redfearn small bays are industrial spaces of 2,500 to 5,000 square feet, usually within a larger building. Each bay consists of an office that occupies about 15% of the space, while the rest is industrial. Typically, they are located in infill areas in industrial areas in major metro markets, In Florida, which include Miami, Tampa, Orlando, Jacksonville, Broward County and Palm Beach, Redfearn told GlobeSt.com.
Small bays are sometimes called “last mile facilities” because they can also serve as warehouses that enable products to reach users quickly. Even Amazon has opened more than 1,000 to facilitate rapid deliveries to its customers.
By other definitions, a small bay is a warehouse with an area of 5,000 to 15,000 square feet. Others, like CoStar, put the limit at 50,000 square feet. Newmark defines a small bay as a warehouse building that is under 100,000 square feet and has multiple tenants.
Typical tenants might include HVAC contractors, ancillary service providers like plumbers, electricians and builders, light manufacturing or other “mom and pop” type businesses serving the local market, Redfearn said.
From an investor’s perspective, small bays offer certain advantages, he noted. They have a diverse range of tenants, mostly on short leases of three to five years that enable landlords to adjust rents frequently. This arrangement also provides a type of inflation protection. However, it does put pressure on landlords to exercise due diligence when signing tenants up to avoid excessive turnover, including assessing credit risk. “You want some to be a little sticky,” Redfearn said.
Small bay facilities are also attracting investors’ attention because vacancy nationwide is very low. In Southern Florida, there is less than 5% vacancy in buildings of less than 10,000 square feet, Redfearn said. A March 2024 CoStar study found that in the 20 tightest markets nationwide the availability rate of properties of less than 50,000 square feet ranged from 5.1% in Las Vegas to as little as 1.6% in Louisville. The median time it took to lease properties of less than 10,000 square feet varied from 3.5 to 1.5 months.
Redfearn said the scarcity is partly due to the rising costs of construction that make small warehouses expensive to build. As a result, he noted, the new product is hard to come by, meaning that existing facilities are in great demand.
“Small bay industrial is a significantly tighter market than bulk distribution,” commented Newmark’s 1Q 2024 report on the U.S. industrial market.