What happens when infill small-bay industrial disappears?

My recent trip to Utah got me thinking more about the fate of older small-bay industrial properties in infill city locations. It’s a theme in many markets. As infill locations, once on the edge of town long ago, become the target of redevelopment or regentrification, it’s common to see older industrial properties razed for apartment, office or retail development. As cities evolve, or grow, or develop a new transit lines, it can shift the make-up of surrounding areas to become more live-work-play and less “just work”. Older metal warehouses are usually the first to go in favor of high-rise, higher density development plays. The returns motivate the decision.

With this phenomenon occurring more often, the question is where do these infill industrial tenants go once displaced? Typically they enjoy their central location, servicing the surrounding business and residential population bases. If a tenant has been in-place for 30 years in a location near a city core and they are suddenly displaced, they face the daunting task of relocation, likely paying higher rent, and having to reestablish their company’s identity at a new location. The friction is enormous. With a new location, they will also likely pay higher transportation costs as new small-bay is typically built on the outskirts of town where land is available at a lower price. And who pays for the higher rents and transportation costs? Presumably the customer unless the corporate players, with lower input costs, are direct competitors and they can hold better pricing with a more efficient distribution network.

Before Amazon, logistics, e-commerce, big box and just-in-time inventory were buzz words that led to the development of massive 1mm SF+ size warehouses, much of the economy operated in a small-bay fashion. Businesses were more mom-and-pop and less corporate. Where people lived and worked was typically much closer than it is today in the commuting world we live in. The conveniences of Wal-Mart and next-day delivery, via the internet, didn’t exist. Customers waited longer, which was okay.

With so many competing uses of prime, infill land, technological changes and very few small bay developers stepping up to the fill the void, we could conceivably see the continued shrinkage and scarcity of small-bay availability. It’s already a disappearing asset class with some of the lowest vacancy rates of any industrial product type in the US. It’s hard to envision a world where this trend ceases to exist. The only way out I can see is rent explosion in the small-bay space. This would disconnect the sub-asset class from it’s Class A brethren and entice more developers to enter the fray. And as the ROI gap to apartment development shrinks, or we learn to develop multi-story industrial, maybe we’ll start to see a return of small-bay once again in prime locations.

Or the term “mixed use” incorporates previously unseen combinations like retail, apartment + warehouse. With the amount of hobby business owners selling on Shopify and operating from their apartment living rooms, the possibility of expanding into a micro-bay warehouse downstairs may not be such a crazy idea.