Small bay success
Small bay industrial tends to sit in the shadow of it’s much larger brethen, Class A distribution centers. Popularized by Amazon and other major retails like Wal-Mart and Target, Class A stole the show when COVID hit and e-commerce rapidly morphed into the monster it is today. Developers quickly hopped on the runaway train and places like the Inland Empire, at the intersection of major interstate, port and rail connection points, rapidly transformed into a sea of large-scale projects as far as the eye can see. Never before have I seen more consecutive buildings in the 1mm+ SF range than driving from LA to Palm Springs.
Long before Amazon, COVID, just-in-time inventory, next day delivery, onshoring and other distribution jargo became popular words in the movement of goods, most cities existed in a much simpler format of industrial complexes with unit sizes often below 10,000 SF. These buildings typically serve the core needs of a town, often in in-fill locations, and house the everyday businesses needed to make the local economic wheels go round for the likes of contractor, local distributors, light manufacturers and suppliers. Some might even call the purposes of these buidings “boring”. As many cities have gentrified in recent years, old warehouses have given way to new apartment buildings and amenities, serving a major reverse imigration of residents into these neighborhoods.
Fast forward to today and what you’ll find is small bay remains as valuable as ever in terms of serving a central role in the facilitating the majority of local economic activity for most towns. And in some instances, the asset class has taken on an even more important role in serving the last mile given their proximity to households, as well as receiving a boost from the larger trend of onshoring and re-shoring. However, things have changed somewhat in the sense that other product types have crowded out existing supply and few developers are buiding in the key areas where these warehouses once existed. Land scarcity, construction costs and high interest tends to be the main impediment, along with less cost benefits from smaller scale projects. With a natural trend towards less availability and lower future development, supply is constrained while demand continues to rise. Simple economics tells us one thing - rents will go up, which they have, sometimes as much as 2x in the past 5 years for strong markets like Austin, Boise and Reno.
Small bay offers other advantages as well. It can flex into other uses like retail, office and storage. In fact, some people even live in small bay warehouses, although that’s more the exception than the rule. Smaller units typically have shorter lease terms, in the 1 - 5 year range, allowing landlords to capture rising rents on a more frequent basis. There’s also other benefits like tenant diversification in multi-tenant complexes and simplicity of management / maintenance as the average warehouse includes much less mechanical, plumbing and finishes that other product types, making it less prone to expensive repairs over the years. The asset class offers a ton of advantages, but rarely grabs the headlines. Like the race of the tortoise vs the hare, small bay keeps going in a low-profile fashion and will likely continue to steadily win the race as larger trends and attention-grabbers come and go.