The Baker House Newsletter Issue III
The Case for Small-Bay Industrial
Difficult to build, durable demand, and most of the buildings are still locally owned. What the numbers show, what to look for, and where the risks are.
THE LEAD
The Workhorse of Industrial Real Estate
This week’s subject is a building type: single-story multi-tenant industrial, divided into suites of roughly 1,000 to 10,000 square feet, each with a grade-level garage door and a small office up front. Brokers call it small-bay, shallow-bay, or light industrial, with size cutoffs that vary by report. The tenants are mostly service businesses, electricians, plumbers, HVAC contractors, repair shops, along with last-mile operators who need to be near the customers they serve.
The numbers describe a tight market. Small-bay vacancy runs about 4.2 percent nationally against 7.4 percent for large-scale industrial, per Yardi data, and rents for these suites have grown more than 40 percent since 2020. On the supply side, light industrial under construction equals roughly half of one percent of existing stock, per Corebridge. The reasons are structural: infill land is expensive, zoning is restrictive, and construction costs favor large buildings, so new competing supply is difficult to add.
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CHART
Source: Yardi data via CRE Daily, 2026. Size definitions vary across research providers; both figures are from the same dataset.
THE TURN
How did a whole category stay this tight while the rest of industrial loosened? CBRE traces the divergence to 2017, when shallow-bay vacancy first fell below the industrial average, and the gap widened because development and institutional capital concentrated in large distribution buildings leased to national tenants. The small multi-tenant buildings were considered too management-intensive for the effort. Demand for them kept growing anyway.
There is an old rule among landlords who have watched decades of renewals: the steadiest rent comes from a business that depends on its address. A plumbing contractor with racking installed, inventory staged, and a customer base ten minutes away faces high friction in relocating, so well-located suites hold their tenants through cycles. That is durable demand in its plainest form, and it is why these buildings stayed full while larger speculative space did not.
The steadiest rent comes from a business that depends on its address.
THE FRAME
One Property, Two Ways to See It
| WHAT THE MARKET SEES | WHAT A DISCIPLINED BUYER SEES |
|---|---|
| A row of plain garage bays | Supply that is difficult and costly to add nearby |
| Small tenants, small rents, little to no credit | A diversified roster of essential local businesses |
| Informal, aging operations | A property that rewards professional management |
WHAT TO LOOK FOR
Configuration. Multiple suites with grade-level doors, decent power, and enough parking for tenants and their crews. More suites means more diversification: no single tenant should dominate the rent roll.
Tenants. Established local service businesses with years at the address are the core. Be cautious with uses that strain the property or the zoning: heavy chemical work, auto dismantling, anything operating outside its permit.
Physical condition. The three costs that surprise new owners are the roof, the paving, and the environment. Ask the age of the roof, walk the lot, and order a Phase I environmental report, especially where automotive or industrial users have a history.
Below-market signals. A long-held owner, informal or handshake leases, a full building with a waiting list, and rents unchanged for years. Each is a sign the property is run for stability rather than value, which is the opportunity and the responsibility.
HOW THE MATH WORKS
An illustration with round numbers, not a market quote. A 20,000 square foot building with eight suites collects 9 dollars a foot on leases signed years ago, while comparable space nearby leases for 12. The building earns 180,000 dollars a year today. A buyer who documents the leases properly, recovers legitimate operating expenses, invests in the roof and the lot, and moves rents gradually toward market as leases roll, while keeping the good tenants, can reach roughly 240,000 over several years. The value created is real, and it comes from professionalizing the property, not from squeezing the people in it. Good tenants renewing at fair market rent is the whole model.
THE RISKS, TOLD STRAIGHT
Every strength here has a matching risk. Short leases reset rents faster in a rising market and create rollover and vacancy exposure in a soft one. Small tenants carry weaker credit than national companies, so one local downturn can hit several suites at once. These buildings can hide environmental problems, unauthorized uses, thin parking, tired roofs and paving, and power limits, and they demand hands-on management: eight tenants means eight relationships, eight renewals, and eight sets of problems. The market data is favorable. The individual building is earned through diligence, and a small-bay property bought carelessly is a management headache with a mortgage on it.
THE WIRE
The capital is following. More institutional money is moving into shallow-bay portfolios, per Corebridge, after a development cycle that concentrated new supply in large-format buildings now carrying materially higher vacancy. It is early days for institutional ownership in this category, and most of these buildings remain in local hands. The advantage that remains for a small buyer is proximity and diligence: knowing a specific building, its tenants, and its town better than capital reading about the category from a distance.
OFFICE HOURS
This issue covered the case, the checklist, the math, and the risks. The judgment, which building, which tenants, which price, is where the real questions start. Richard takes them every Wednesday at 2pm ET in his free office hours. No slides, no pitch. He answers whatever attendees ask, live, for an hour. If this issue raised a question for you, bring it.
SOURCES
- Yardi data via CRE Daily, 2026: small-bay vacancy 4.2 percent; large-scale industrial 7.4 percent; small-bay rents up more than 40 percent since 2020.
- Corebridge Financial, light industrial outlook, 2026: light industrial under construction at 0.5 percent of existing stock; institutional capital shifting toward shallow-bay portfolios.
- CBRE Research, shallow-bay availability brief: shallow-bay vacancy below the industrial average since 2017; development concentrated in large-format buildings.