The Untapped Potential of Smaller Industrial AssetsBy Dov Hertz

The industrial real estate sector has undergone a rapid transformation in recent years, with developers overwhelmingly focusing on large-scale projects, particularly warehouses exceeding 100,000 square feet. While larger properties benefit from economies of scale, this focus has created a significant opportunity for smaller industrial assets—those under 100,000 square feet—that are increasingly in short supply.

Smaller buildings are outperforming larger assets in occupancy rates, rent growth, tenant stability, and investment liquidity. For commercial real estate professionals, understanding this trend is critical to capitalizing on a growing, underserved segment of the market.

The Supply Imbalance: Big Boxes Dominate, Smaller Spaces Lag

The supply of large industrial buildings (100,000 square feet or greater) has increased by 30.7% in recent years, driven by developers seeking cost efficiency and the ability to serve major logistics operations. In contrast, the supply of smaller industrial buildings (under 100,000 square feet) has grown by just 3.7% during the same period​.

While economies of scale favor larger developments, this trend has led to an under-supply of smaller industrial properties—particularly shallow-bay facilities and mid-size warehouses under 50,000 square feet. These spaces account for 28% of existing U.S. industrial inventory but represent less than 4.4% of the current construction pipeline​.

The disconnect between supply and demand is creating a strong competitive advantage for smaller properties. Tenants seeking flexible, well-located industrial spaces face few alternatives, driving both occupancy rates and rents higher.

Higher Occupancy Rates in Smaller Buildings

One of the clearest indicators of demand for smaller industrial assets is their superior occupancy rates. Since 2010, vacancy rates for buildings under 100,000 square feet have decreased by 4.1%, compared to just 2.8% for larger industrial properties​. Currently, vacancy rates for smaller buildings average 3.6%, which is 310 basis points lower than those for properties larger than 100,000 square feet​.

This performance reflects the sustained demand for smaller spaces, particularly in regional markets where accessibility and delivery speed are critical for businesses. Whether for manufacturing, last-mile logistics, or small-scale distribution, smaller industrial properties offer flexibility that larger assets often cannot match.

Rent Premiums for Smaller Industrial Assets

The scarcity of smaller industrial spaces has created a significant rent premium. The average triple-net (NNN) rent for properties under 100,000 square feet is $10.94 per square foot, which is nearly 45.9% higher than the $7.50 average for buildings larger than 100,000 square feet​.

Moreover, smaller industrial buildings have consistently outperformed their larger counterparts in rent growth. Since 2010, rent growth for smaller assets has exceeded that of larger spaces by 17 basis points, resulting in a 14-year compound annual growth rate (CAGR) of 5.37%​.

For investors and landlords, these metrics highlight the revenue potential of smaller industrial properties. The combination of low vacancy and higher rents makes these assets an attractive, income-generating investment.

A Larger and More Diverse Tenant Pool

Smaller industrial properties benefit from a larger, more versatile tenant pool. Buildings under 25,000 square feet account for over 50% of leasing deals in 2024, with this share increasing each year since 2021​. In contrast, leasing activity in larger spaces has stagnated or declined.

This trend reflects the diverse uses for smaller industrial spaces, which range from local warehousing and distribution to small-scale manufacturing, retail support, and specialty services. Many tenants in this size category are small-to-medium businesses (SMBs), which drive local economies and require flexible space solutions.

Tenant Stability: Smaller Tenants Stick Around

Another key advantage of smaller industrial buildings is tenant “stickiness.” Subleasing activity—a common measure of tenant turnover—has remained exceptionally low for smaller assets. Since 2021, subleases have accounted for just 4.67% of leasing activity in buildings under 50,000 square feet, compared to 10.38% in larger spaces​.

This low turnover reflects two critical factors:

Lack of Alternatives: With few smaller spaces available in the market, tenants have limited options for relocation.

Operational Fit: Smaller tenants often customize their spaces to meet operational needs, making relocation costly and impractical.

For landlords and investors, the stability of smaller tenants translates to reduced vacancy risk and more predictable cash flow.

Liquidity Advantages: Stronger Investment Demand for Smaller Deals

Investment activity in industrial real estate has increasingly shifted toward smaller transactions. Deals under $100 million accounted for 65% of total investment volume over the past year, compared to a long-term average of 59%​.

The most significant growth has been in deals under $25 million, which are up 3% compared to pre-pandemic averages​. This trend highlights investor confidence in smaller industrial assets, which offer lower capital requirements, stronger cash flow potential, and greater liquidity compared to larger properties.

For investors seeking stable returns in a challenging market, smaller industrial properties represent a compelling opportunity.

Why Smaller Industrial Assets Matter Now

The industrial real estate market is at a crossroads. While developers continue to focus on larger projects, the data shows that smaller industrial assets are outperforming in multiple key areas:

• Lower Vacancy: Occupancy rates remain consistently higher in smaller buildings.
• Higher Rents: Rent premiums for smaller assets reflect their scarcity and strong demand.
• Tenant Diversity: Smaller buildings appeal to a broad, versatile tenant base.
• Stability: Tenants in smaller spaces are less likely to sublease or relocate.
• Liquidity: Strong investor demand for smaller deals drives transaction volume and market confidence.

For commercial real estate professionals, the opportunity is clear: The supply-demand imbalance in smaller industrial properties creates a chance to capitalize on stable, income-producing assets with long-term growth potential.

Seizing the Opportunity in Smaller Industrial Assets

The industrial real estate sector has long been dominated by big-box warehouses, but the future may belong to smaller spaces. With low vacancy rates, higher rents, and strong tenant stability, smaller industrial assets offer a unique value proposition in an increasingly competitive market.

For investors, developers, and brokers, the time to act is now. By recognizing the potential of smaller industrial properties and addressing the unmet demand for flexible, well-located spaces, CRE professionals can unlock significant value and position themselves for long-term success.