Section 1: Executive Summary
Small-bay industrial is the most supply-constrained segment of U.S. commercial real estate – vacancy rates sit at half the national average, new construction is effectively nonexistent, and demand is accelerating from every direction.
Within this segment, the smallest end of the spectrum – what we call micro-bay industrial (units under 5,000 SF) – faces even more acute constraints. WareSpace focuses on the 200–2,000 SF range within this category.
The Supply Problem
Small-bay properties make up 29% of existing industrial inventory but represent less than 2% of the construction pipeline.
Why? New small-bay development costs $160-220/SF (depending on where in the country) versus $95-140/SF for big-box logistics (across most major metrics, excluding extremely high-priced tier-1 markets). Developers can’t make the economics work, so they don’t build. Meanwhile, existing small-bay properties trade at 40%+ discounts to replacement cost, signaling just how hard it would be to replicate this inventory today.
The result: 4.2% vacancy for small-bay versus 7.5% for overall industrial – the largest gap ever recorded.
A note on data availability: Industry research firms (CoStar, CBRE, JLL, Cushman & Wakefield) do not publish vacancy data for spaces under 10,000 SF—the market is too fragmented to track at that level. Throughout this report, we use sub-10K and sub-15K SF vacancy data as proxies for the micro-bay segment. For this report, we define micro-bay as sub-5,000 SF and small-bay as sub-50,000 SF – the segments where supply constraints are most acute and where co-warehousing operators concentrate. The actual vacancy rate for spaces under 5,000 SF is likely even tighter than the figures cited, but cannot be precisely measured with available third-party data.
The Demand Side
Four forces are converging on small-bay demand simultaneously:
Tariffs and trade uncertainty. Depending on measurement (headline vs. effective rates), U.S. tariffs currently range from ~17% to over 22% – the highest levels since the early 20th century. Companies are stockpiling inventory, and they need space to put it.
Reshoring momentum. 244,000 manufacturing jobs were announced via reshoring in 2024 alone. The second million reshoring jobs took just 4 years vs 10 years for the first million.
E-commerce growth. Projected to hit $1.47 trillion in 2025, e-commerce requires roughly 3x more warehouse space than traditional retail, and last-mile fulfillment needs small, urban facilities.
Record entrepreneurship. 473,679 new business applications per month – the strongest 4-year streak on record. These businesses need space to operate.
Capital Is Paying Attention
Institutional investors have caught on. Small-bay transactions represented 62% of industrial deal volume in 2024. Institutional buyers increased their market share to 23% in Q1 2025 – up from 16% just two years prior.
The headline deal: BKM Capital Partners and Kayne Anderson Real Estate launched a $1.5 billion joint venture in 2025 specifically targeting small-bay acquisitions. That’s serious capital chasing a category that was institutionally underrepresented just a decade ago.
The Gap That Created the Opportunity
Traditional industrial real estate has ignored small businesses for decades.
Co-warehousing and micro-bay industrial fill this gap: purpose-built facilities with units from 200–2,000 SF, short-term leases, and shared infrastructure that lets small businesses operate professionally without the traditional warehouse headaches.
Option
Size
The Reality
Garage/spare bedroom
<500 SF
Where most entrepreneurs start
Self-storage unit
100–500 SF
Storage only – no loading docks, no operations
The gap
500–5,000 SF
Almost nothing available
Traditional warehouse
5,000–50,000 SF
3–5 year leases, personal guarantees, NNN complexity
Big-box logistics
50,000+ SF
Built for enterprise, not small business
What This Report Covers
- Defining the Category – What micro-bay and small-bay mean, and where co-warehousing fits
- The Supply Crisis – Why vacancy is half the national average and why developers won’t build
- Demand Drivers – Tariffs, reshoring, e-commerce, and the entrepreneurship boom in detail
- Metro Market Spotlights – Nine key markets with vacancy, rent, and demand data
- Investment Landscape – Where institutional capital is flowing and why
- Competitive Landscape – Operators shaping the category
- 2025–2026 Outlook – What to expect and what to watch
2025 at a Glance
Small-bay vacancy
Share of construction pipeline
<2% (despite 29% of inventory)
2024 transaction share
62% of deals under 150,000 SF
New institutional JV capital
$1.5B+ announced
U.S. small businesses
Average tariff rate
Reshoring jobs (2024)
Section 2: The Supply Crisis
The small-bay industrial market has a math problem: demand keeps growing, but supply doesn’t.
It’s structural: baked into the economics of development, the realities of construction costs, and the way capital has flowed for decades. Understanding why supply can’t catch up is essential to understanding why this asset class behaves differently from the rest of industrial real estate.
The Numbers
Small-bay properties account for 29–36% of existing U.S. industrial inventory, depending on how you define the category. But they represent less than 2% of the construction pipeline, and by some measures, as little as 0.3%.
To put that in perspective: only 23 million square feet of small-bay industrial space is under construction across the entire United States. Meanwhile, developers delivered 400+ million square feet annually of mostly large-format logistics space in recent years.
The result: small-bay inventory grew just 3% over the past decade. During that same period, employment in industries that rely heavily on small-bay space – construction, wholesale trade, technical contractors, and residential services – grew by 20%.
Demand up 20%. Supply up 3%. It’s a decade-long mismatch with no end in sight.
Why Developers Don’t Build Small
The economics of small-bay development simply don’t work for most builders.
Construction costs have exploded. The warehouse construction cost index shows a 44% increase from the start of the pandemic to today. As of early 2025, medium-sized warehouse construction averages $85/SF, while large projects come in around $77/SF. But small-bay development – with its higher per-unit costs for demising walls, HVAC systems, electrical, plumbing, and common areas – runs significantly higher, often$160-220/SF or more for quality multi-tenant product.
No economies of scale. Building a 500,000 SF distribution center lets developers spread fixed costs across massive square footage. Building twenty 5,000 SF units in a multi-tenant property doesn’t. The entitlement process, site work, and permitting take nearly as long for a small project as a large one – but the revenue potential is a fraction.
Land constraints. The infill locations where small-bay demand is strongest are exactly where developable land is scarcest and most expensive. Urban cores, established industrial corridors, and transit-accessible sites command premium prices that make the math even harder.
Financing challenges. Lenders prefer the simplicity of single-tenant deals with long-term credit tenants. Multi-tenant small-bay – with its operational complexity, shorter leases, and diverse tenant base – requires more specialized underwriting. Many traditional lenders simply won’t touch it.
The bottom line: it’s prohibitively expensive to build anything below 75,000 SF because builders can’t achieve the economies of scale that make larger projects profitable.
The Replacement Cost Gap
Here’s what makes existing small-bay assets so valuable: comparable buildings sell below today’s replacement costs.
Many of these properties – often 20, 30, or 40+ years old – would be nearly impossible to replicate today. The land isn’t available. The zoning doesn’t exist. The construction costs don’t pencil. And yet these vintage buildings, properly maintained and upgraded, continue to perform exceptionally well.
This creates a structural advantage for existing asset owners. When you can acquire a property at 40%+ discounts to replacement cost, you’re buying into a market where new competition simply cannot be built at a price that threatens your position.
As one investor noted: “We have purchased these buildings well below replacement cost with below-market rents.” That combination creates embedded upside that doesn’t depend on market conditions improving.
Vacancy: The Proof Point
The supply shortage shows up clearly in vacancy data.
Small-bay vacancy (<50K SF) sits at 4.2% – roughly half the 7.5% vacancy rate for overall industrial. At the micro-bay level (<5K SF), vacancy is even tighter—though precise data isn’t available, the closest proxy (sub-10K SF) shows just 3.5% availability. To put that in context, CoStar notes that small-bay vacancy is within one percentage point of the apartment vacancy rate in New York City – a market known globally for its perennial housing shortage.
The divergence is even starker when you compare small-bay to the big-box segment that dominated development over the past decade. Vacancy in properties over 150,000 SF is now nearly double that of smaller properties. Developers overbuilt large logistics space while ignoring small-bay entirely.
Even in a scenario where small-bay tenant demand contracted as dramatically as it did during the 2009 financial crisis, vacancy would remain more than 50 basis points below its pre-pandemic 15-year average. The supply deficit is that severe.
Rent Growth Reflects the Shortage
When supply can’t meet demand, rents rise. And small-bay rents have risen dramatically.
Rents for small-bay suites under 50,000 SF have grown over 40% since 2020, compared to roughly 30% for the broader industrial market. In many markets, asking rents have roughly doubled over the past decade – from $5–6/SF NNN to $12–15/SF NNN for quality space in desirable locations.
The geographic pattern is notable: rent growth in the top 10 highest-rent metros has begun to plateau (up just 1.6% for small-bay in markets like LA, San Diego, NYC, and Seattle), but secondary markets are still seeing 5.9%+ annual growth. The supply shortage is spreading outward from gateway cities to emerging markets.
CompStak projects that small-bay rent growth will outpace bulk industrial in 2025 – continuing a multi-year trend of divergence between the two segments.
Why This Won’t Change Soon
Even with rents at record highs, the supply response will be minimal.
The pipeline remains tiny. Whatever gets built in 2025–2026 represents less than 0.5% of existing stock. Even if small-bay construction doubled, it would barely register against demand.
Construction starts have slowed across all industrial. Nationwide industrial space under construction is down 25% year-over-year. Developers are pulling back broadly, not pivoting to small-bay.
Interest rates remain elevated. Higher financing costs make speculative development harder to pencil, particularly for operationally intensive multi-tenant projects.
New projects pre-lease immediately. The few small-bay developments that do get built are largely pre-leased or sold out before completion. In Las Vegas, a new small-bay project delivered in 2022 reached full occupancy within one month. Supply gets absorbed instantly.
The data points in one direction: small-bay supply will remain structurally constrained for years. The shortage isn’t a temporary dislocation – it’s a persistent feature of the market.
What This Means for Investors
The supply crisis creates a specific investment thesis:
Existing assets appreciate. When you can’t build new competition, existing properties become more valuable. Owners can raise rents, improve occupancy, and sell at higher multiples – all because tenants have nowhere else to go.
Downside protection is built in. Even in economic downturns, the supply shortage provides a floor. As one investor put it: “When combined with prohibitive land costs that often prevent the development of small infill sites and limit competition from new supply, there is a compelling case for the downside protection small bay industrial offers in a shaky economic environment.”
Adaptive reuse becomes the path to supply. With new ground-up development uneconomic, the growth strategy shifts to converting existing properties – obsolete retail, dated office, underperforming industrial – into modern small-bay facilities. This is exactly the model WareSpace and other co-warehousing operators have built their businesses around.
Operational expertise matters more. In a market where you can’t simply build your way to returns, the value creation comes from management: leasing velocity, tenant retention, rent optimization, capital improvements. The operators who excel at running multi-tenant portfolios will capture disproportionate returns.
The Supply Crisis in One Chart
Segment
Share of Existing Inventory
Share of Construction Pipeline
Small-bay (<75K SF)
29–36%
<2–5%
Mid-bay (75K–150K SF)
~15%
~8%
Big-box (150K+ SF)
~50%
~87%
Sources: CoStar, Matthews, Rectangle Group, Corebridge Financial
The mismatch is stark. Small-bay is structurally underbuilt – and that’s not changing anytime soon.
Section 3: Demand Drivers
Small-bay industrial demand isn’t growing because of a single trend. It’s accelerating because four structural forces are hitting the market simultaneously, together creating unprecedented pressure on an already undersupplied segment.
1. Tariffs and Trade Policy: The Inventory Surge
The United States is operating under the highest tariff rates in nearly a century.
According to The Budget Lab at Yale, the average effective tariff rate reached 16.8% as of November 2025 – the highest since 1935. Earlier in the year, headline rates peaked near 22.5% (the highest since 1909), while effective rates peaked at nearly 19%. The distinction matters for analysis, but the directional signal is clear: tariff policy is reshaping supply chains and driving warehouse demand.
The stockpiling effect is massive. Data from supply chain technology provider Deposco shows a 228% increase in Days of Inventory on Hand between February and April 2025 as companies raced to front-load imports before tariff deadlines. Prologis reports warehouse utilization averaged 85% in Q2 2025, up 50 points from the 2024 average, driven by customers front-loading inventories in response to changing trade policies.
This doesn’t appear temporary – the Logistics Manager’s Index hit 62.8 in February 2025 – the fastest expansion reading since June 2022 – with inventory costs at 77.3 and warehousing prices at 77.0, indicating significant cost pressure from the stockpiling surge.
Small-bay benefits disproportionately. The companies most affected by tariffs – small and mid-sized importers who lack the capital to absorb costs or the leverage to negotiate with suppliers – are precisely the businesses that need small-bay space. A 2025 survey from the Toy Association found that nearly half of U.S. toy companies could go out of business if current tariffs persist, citing the inability to pivot fast enough to remain competitive. These businesses need flexible, right-sized warehouse space to manage inventory buffers without committing to long-term big-box leases.
2. Reshoring and Manufacturing Reindustrialization
Manufacturing is coming back to the United States at a pace not seen in decades.
The Reshoring Initiative’s 2024 Annual Report shows that 244,000 U.S. manufacturing jobs were announced in 2024 via reshoring and foreign direct investment (FDI). Since 2010, over 2 million jobs have been announced through these channels. The acceleration is striking: the second million reshoring jobs took just 4 years versus 10 years for the first million.
Tariffs are now a primary motivator. According to the Reshoring Initiative, tariffs were cited in 454% more cases in 2025 versus 2024 as a key factor driving reshoring decisions. Government incentives, by contrast, were cited 49% less frequently as previous subsidies phase out.
The geography of reshoring favors small-bay. Reshored manufacturing doesn’t arrive as massive 500,000 SF distribution centers. It comes as dozens of small and mid-sized manufacturers setting up domestic production – tool and die shops, component suppliers, specialty fabricators, and light assembly operations. These businesses typically need 2,000–15,000 SF of industrial space, squarely in the small-bay sweet spot.
The Initiative notes that “low-tech industries remain under-reshored, leaving U.S. supply chains vulnerable for mass-market consumer goods.” This represents a significant pipeline of future small-bay demand as companies work to fill domestic supply chain gaps.
The policy tailwinds continue. Even with government incentives declining from their peak, bipartisan support for American industrial competitiveness remains strong. The CHIPS Act, IRA, and Infrastructure Bill created the initial wave; tariff policy is creating the sustained push. And manufacturing apprenticeships have risen 83% over the past decade, indicating workforce investment to support the trend.
3. E-Commerce: Relentless Growth, Relentless Space Demand
E-commerce continues its structural growth, and every dollar of online sales requires more warehouse space than traditional retail.
According to the U.S. Census Bureau, retail e-commerce sales hit $304.2 billion in Q2 2025 (seasonally adjusted) – up 5.3% from Q2 2024. E-commerce now represents 16.3% of total retail sales, continuing its steady climb from 11.9% in Q1 2020.
The math on warehouse demand is straightforward. Industry estimates consistently show that e-commerce requires 2.5–3x more warehouse space per dollar of sales than traditional retail.
Small-bay serves the long tail. Amazon and Walmart handle the massive volume, but millions of e-commerce sellers need their own space. The SBA reports 34.8 million small businesses in the United States – and the retail industry saw the biggest driver of new business application growth during the pandemic, with applications nearly doubling from 525,000 in 2019 to nearly 1 million in 2021.
These sellers graduate from garage operations and need professional space for inventory storage, fulfillment, and shipping – but don’t need 50,000 SF distribution centers. They need 500–3,000 SF with dock access, climate control, and carrier pickups. That’s exactly what micro-bay and co-warehousing provide.
Last-mile logistics creates urban demand. As delivery expectations compress to same-day and next-day windows, e-commerce fulfillment pushes closer to population centers. Urban and infill industrial locations – where small-bay properties dominate due to parcel constraints and zoning – become increasingly valuable. Big-box logistics simply can’t serve this need; the buildings don’t fit the parcels.
4. The Entrepreneurship Boom: Record Business Formation
The United States is experiencing the strongest period of business formation in its history.
According to the U.S. Census Bureau’s Business Formation Statistics, business applications have averaged 430,000–480,000 per month since 2021 – roughly double the pre-pandemic baseline of 280,000–300,000 monthly applications. The 2021–2024 period represents the strongest four-year streak of business formation on record.
These aren’t just consulting LLCs. The Census Bureau tracks “high-propensity” business applications – those most likely to result in employer businesses with payroll. These applications have also remained elevated, indicating real business formation activity rather than just tax entity creation.
Small businesses need small spaces. The SBA’s 2024 data shows:
- 34.8 million small businesses in the United States
- Small businesses employ 45.9% of private sector workers (59 million people)
- Small businesses represent 43.5% of GDP
- Small businesses pay 39% of all private sector payroll
These businesses eventually outgrow home offices, garages, and spare bedrooms. When they do, the traditional industrial real estate market has nothing for them. Self-storage units don’t allow business operations. Traditional warehouse leases start at 5,000+ SF with 3–5 year terms and personal guarantees.
The gap is structural. For every Amazon-scale operation, there are thousands of small businesses that need 200–2,000 SF of professional warehouse space. These businesses represent the core demand for micro-bay and co-warehousing facilities – and their numbers are growing faster than at any point in American economic history.
The Demand Convergence
What makes the current moment unique isn’t any single demand driver – it’s the simultaneous convergence of all four:
Driver
Key Metric
Small-Bay Impact
Tariffs
17-22% (effective to headline rates)
Inventory buffers require flexible space
Reshoring
244,000 jobs announced (2024)
Small manufacturers need right-sized facilities
E-commerce
16.3% of retail, $304B quarterly
Fulfillment operations at every scale
Entrepreneurship
430K+ monthly business applications
Record business formation needs space to grow
Each driver individually would increase small-bay demand. Together, they create compounding pressure on a segment that was already severely undersupplied before any of these trends accelerated.
The supply constraints detailed in Section 2 – virtually no new construction, sub-4% vacancy, rent growth outpacing big-box – exist precisely because demand has outstripped supply for years. These four factors signal that gap will continue to widen, not close.
What This Means for the Market
For occupiers: Competition for quality small-bay space will intensify. Businesses should expect continued rent growth, longer waitlists at desirable facilities, and limited negotiating leverage on lease terms. Securing space early – even before it’s needed – becomes a strategic advantage.
For investors: Demand fundamentals are as strong as they’ve been in the history of the asset class. The combination of structural undersupply and accelerating demand creates favorable conditions for rent growth, occupancy, and asset appreciation. Markets with strong reshoring activity, e-commerce penetration, and entrepreneurship rates warrant particular attention (we’ll dive deeper into the most in demand markets in our next section).
For developers and operators: Operators who can efficiently transform older industrial, retail, or flex properties into multi-tenant small-bay facilities have significant runway ahead.
Section 4: Metro Market Spotlights
The national story – 3.4% small-bay vacancy versus 7.5% overall – plays out differently across metros. Some markets show even sharper divergence. Others face unique dynamics worth understanding. Here’s what the data shows in the markets where small-bay demand is strongest – and where WareSpace is positioning for growth.
Note on metrics: In many markets, “small-bay” overlaps with flex and light manufacturing categories. Metrics are cited using the closest available proxy where sub-15,000 SF data is unavailable.
Dallas-Fort Worth
The Divergence Capital | 4 WareSpace Locations | 650,000 SF Portfolio
DFW shows the clearest split between small-bay and big-box performance in any major U.S. market – and WareSpace has bet heavily on this thesis.
Metric
Small-Bay
Overall Market
Vacancy Rate
6.1–6.3% (Flex)
9.1–9.2%
Avg. Rent
$13.66–13.79/SF
$9.70/SF
Leasing Velocity
1–3 months
6+ months
What’s happening: Since 2020, DFW added 239 million SF of new industrial space – nearly all of it large-format logistics. There are typically fewer than ~150 actively marketed options at any given time for small businesses seeking < 2,000 SF in the DFW area, despite this segment representing 25% of inventory.
Small-bay advantage: Buildings under 50,000 SF show ~6% availability versus 15% for buildings over 500,000 SF. The Western Lonestar/Turnpike corridor maintains sub-2% small-bay availability. Infill submarkets command 50%+ rent premiums over warehouse/distribution space.
WareSpace DFW Portfolio: 650,000 SF Across 4 Locations
Our newest addition: Plano (174,500 SF) – a former big-box retail property at 700 E Plano Parkway with George Bush Turnpike frontage. The Plano City Council unanimously approved rezoning for our adaptive reuse project, which will serve 160+ small businesses. This deal exemplifies our approach: finding functionally obsolete retail and converting it into productive small business infrastructure.
The acquisition brought our DFW metro total to 650,000 SF – making it our largest regional footprint nationally.
Investment outlook: Population growth of 2 million residents since 2010 drives sustained demand. Blackstone and Goldman Sachs expanding presence (including a $500M to build a new office campus in downtown Dallas) signals institutional confidence in DFW despite elevated overall vacancy.
Phoenix
Big-Box Oversupply, Small-Bay Shortage | WareSpace South Tempe just opened in January 2026
Phoenix delivered more industrial space than any Sun Belt market from 2020-2024 – and most of it is struggling to lease. Small-bay is a different story entirely.
Metric
Small-Bay
Overall Market
Vacancy Rate
5.6% (<100K SF)
10.9–13.4%
Construction Pipeline
Virtually none
Down from 28M SF to 11.2M SF
Rent Growth
At record highs
Flat to declining
What’s happening: Phoenix’s direct industrial vacancy fell to 10.9% in Q2 2025, marking the first quarterly drop after seven straight quarters of increases. This wasn’t driven by demand collapse – it happened because new deliveries cooled dramatically to just 3.5 million SF in Q2 (the lowest quarterly volume since 2021) while net absorption remained strong at 2.6 million SF.
The critical insight: When big spec buildings stop flooding the market, it takes pressure off smaller spaces. Spaces under 100,000 SF sit at 5.6% vacancy – nearly half the broader market’s rate. Phoenix added 128 million SF between 2020-2024 (a 29% inventory jump), but that wave is now receding, revealing where real demand sits: in well-located, flexible, small-format spaces.
Arizona is home to over 650,000 small businesses – 99.5% of all Arizona businesses. The state added 118,015 new LLCs in 2024 alone and ranks #8 nationally for new business growth. Nearly all the 128 million SF of new construction missed this demand entirely.
As one Phoenix-based e-commerce operator told us: “When we started looking in 2022, we had maybe two options for spaces under 2,000 SF. Now everyone’s calling us about availability in those larger spec buildings, but we don’t need 50,000 square feet – we need 1,500 SF with dock access and flexible terms.”
Location: 9801 S. 51st Street, Phoenix, AZ Position: 2 minutes from I-10, equidistant to Tempe and Chandler, in the heart of the Southeast Valley Timing: Entering Phoenix precisely as the market transitions from oversupply to equilibrium
The Southeast Valley corridor has the highest small business density in the metro – and the tightest small-bay supply. We’re positioning where the structural constraint is most acute.
Denver
Mountain West Momentum | 2 WareSpace Locations | 200,000 SF Portfolio
Denver’s industrial market maintains favorable fundamentals, with small-bay demand outpacing supply across the Front Range.
Metric
Small-Bay
Overall Market
Vacancy Rate
Below 5% (infill)
6.5–7.5%
Rent Growth
Steady increases
Moderating
Construction
Limited small-bay
Mostly large-format
What’s happening: Denver’s entrepreneurial ecosystem continues driving demand for flexible small-bay space. Infill locations near population centers command premiums, while large-format vacancy has risen with new deliveries.
WareSpace Denver: 200,000 SF Across 2 Locations
Centennial (71,000 SF): Our first Denver location – a converted call center that demonstrates adaptive reuse potential. Single-story office building with no existing docks, transformed into fully functional small-bay industrial. “It’s a beautiful building, single story office, no docks, doesn’t look like a warehouse, but beautiful natural light all around it. We built and put in dock wells and basically retrofit a defunct call center.” – Jeff Jenkins, VP Acquisitions
Park Hill (129,000 SF): Off-market acquisition at 5150 Colorado Blvd, just off I-70. 40+ dock doors, minutes from downtown Denver. Opening Spring 2026.
Together, these locations create a comprehensive small business warehouse network across the Denver metro.
The Centennial lesson: We target buildings that are “functionally obsolete” – low clear heights, poor circulation, limited parking. As Jeff Jenkins, our VP of Acquisitions, mentioned: “We can upfit a dysfunctional product… buildings that don’t have great ingress/egress access, buildings that are functionally obsolete. We’re trying to find warehouses in non-industrial warehouse-y spaces.”
Washington D.C. / Northern Virginia
The Tightest Market in the Nation | 2 WareSpace Locations | Opening Early 2026
Northern Virginia maintains some of the lowest industrial vacancy rates in the country – and the highest barriers to new supply.
Metric
Data Point
Overall Vacancy
4.0–4.8%
Avg. Rent
$16.61–16.79/SF NNN
Construction Pipeline
448–792K SF (multi-year low)
What’s happening: The D.C. metro industrial market maintains sub-5% vacancy rates – roughly half the national average. But the bigger story is supply: just 448,000–792,000 SF is under construction, the lowest level since 2021. Land scarcity and competition with data center development have effectively eliminated new small-bay supply.
Premium pricing: Average rents of $16.61–16.79/SF NNN are among the highest in the mid-Atlantic, reflecting the severity of the supply constraint. Alexandria and the I-95 corridor remain particularly constrained.
WareSpace Alexandria: 100,000 SF | Opening Early 2026
Location: 950 S Picket Street, Alexandria, VA Acquisition: $19.5M off-market transaction via JLL (John Dettleff and Bill Prutting) Position: Minutes from I-395/I-495 connector, 20 minutes to downtown D.C. Context: D.C. metro industrial vacancy sub-4% – harder to find small warehouse space than a parking spot in Georgetown
This marks WareSpace’s second D.C. metro location, addressing the “where do I put my business that’s outgrown my garage but isn’t ready for a 10,000 SF commitment?” problem.
South Florida (Fort Lauderdale)
New Market Entry | WareSpace Facility #20 | 2M+ SF Portfolio Milestone
The Fort Lauderdale acquisition marked two major milestones: WareSpace’s 20th facility and the portfolio exceeding 2 million square feet nationwide.
Metric
Data Point
Building Size
60,000 SF
Location
700 NW 57th Court, Broward County
Position
Minutes from I-95, 15 minutes to downtown Fort Lauderdale
Expected Tenants
100+ small businesses across tri-county metro
Why South Florida: The tri-county area (Broward, Miami-Dade, Palm Beach) represents one of the most dynamic small business markets in the country, but traditional warehouse options largely ignore businesses operating between garage startups and full-scale distribution operations.
WareSpace Fort Lauderdale: First South Florida Location
E-comm sellers running operations from Coral Springs garages. Hialeah contractors managing inventory from storage units. Creators in Wynwood turning down orders because they have nowhere to store products.
The problem is consistent across markets: industrial real estate jumps from storage units to massive warehouse leases. There’s nothing for growing South Florida businesses in between.
Atlanta
Small Deals Dominating | 2 WareSpace Locations
Atlanta’s big-box market shows strain. Small-bay tells a completely different story – and investors are noticing.
Metric
Small-Bay
Overall Market
Vacancy Rate
3.7–4.1% (<50K SF)
8.6–9.0%
Share of Leasing
87% of deals
–
Investment Share
35% of volume (up from 20%)
–
What’s happening: Warehouses under 100,000 SF had just 3.7% vacancy in early 2024, compared to 9%+ for distribution centers averaging 700,000 SF. More striking: buildings under 50,000 SF accounted for 87% of all lease transactions.
Capital flows: Since 2021, the share of annual industrial investment volume allocated to smaller assets has risen from roughly 20% to 35% by 2025. Investors are rotating out of oversupplied big-box and into supply-constrained small-bay.
The Port advantage: Georgia’s seaports and I-85/I-20 corridors make Atlanta North America’s fifth-largest big-box market. But the same infrastructure supports small importers, e-commerce operators, and light manufacturers who need smaller, flexible spaces.
Chicago
Structural Undersupply in the Midwest’s Hub | 2 WareSpace Locations | 120,000 SF Portfolio
The nation’s largest industrial market maintains tight conditions overall – and even tighter conditions in small-bay.
Metric
Small-Bay
Overall Market
Vacancy Rate
Below 3% (core infill)
5.3–5.9%
Rent Growth
+30% since 2020
+4.2% YoY
Large-Bay Vacancy
–
7–8% (500K+ SF)
What’s happening: Small-bay vacancy has stayed below 4% for five consecutive years in core Chicago submarkets. Meanwhile, large-bay vacancy (500K+ SF) has climbed to 7–8%. Asking rents for small-bay are up 30% since 2020 while large-format rent growth has flattened.
The O’Hare advantage: The O’Hare/Elk Grove/North Cook corridor remains one of the tightest industrial corridors in the nation. Infill locations near population centers command significant premiums, and there’s essentially no land available for new small-bay development.
Policy tailwind: The City of Chicago’s Small Business Improvement Fund offers up to $250,000 in reimbursement grants for industrial property improvements, with multi-tenant properties eligible for up to $100,000 per tenant.
Houston
The Port City Advantage | 1 WareSpace Location
Houston has avoided the oversupply problems plaguing other Sun Belt markets – and small-bay fundamentals remain exceptionally strong.
Metric
Small-Bay
Overall Market
Vacancy Rate
Sub-5% (core submarkets)
7.3–7.4%
Absorption Streak
–
59+ consecutive quarters positive
Manufacturing Vacancy
2.0–2.4%
–
What’s happening: Houston recorded 59 consecutive quarters of positive absorption before hitting a recent pause. Unlike DFW and Phoenix, Houston hasn’t overbuilt small-bay space – creating runway for continued rent growth in sub-50,000 SF facilities.
Manufacturing tightness: Manufacturing vacancy stands at just 2.0–2.4% – extremely tight by any measure. The Northern Outer Loop submarket, where two-thirds of inventory comprises properties under 30,000 SF, maintains 5.2% vacancy with tenant demand concentrated in sub-15,000 SF spaces.
Investment opportunity: Well-leased warehouses under 40,000 SF priced at or under $5 million remain “popular investments” according to Matthews Real Estate, with quick execution and strong buyer competition.
Philadelphia
Manufacturing Resilience | 1 WareSpace Location
Philadelphia’s overall vacancy has climbed, but manufacturing and small-bay segments tell a different story.
Metric
Manufacturing
Overall Market
Vacancy Rate
3.5%
8.9%
Rent Growth
+4.1% YoY
–
Avg. Rent
$11.43/SF NNN
–
What’s happening: Overall vacancy reached a record 8.9% by mid-2025 – but manufacturing vacancy stands at just 3.5%, nearly half the 6.2% overall industrial rate. The gap indicates tighter conditions in smaller, operationally-focused spaces versus large logistics facilities.
Supply correction: The construction pipeline declined 58.5% from prior year to 6.9 million SF, which should help stabilize market conditions. Southern New Jersey drove 64% of 2024 occupancy gains.
Salt Lake City
The Entrepreneurship Hotspot | 1 WareSpace Location
Utah’s fundamentals stand out: tightest small-bay vacancy in the Intermountain West, combined with the nation’s strongest business formation environment.
Metric
Small-Bay
Overall Market
Vacancy Rate
2.5% (ex-bulk)
5.9–7.4%
Absorption Growth
+200% YoY
–
Construction
7-year low
1.75M SF underway
The entrepreneur effect: Utah ranks #1 as the best state for starting a business, with the greatest access to business loans and the largest annual employment growth at nearly 2.5%. The state’s Startup State Initiative and seven new Inland Port Authority submarkets are driving economic development.
Minneapolis-St. Paul
Midwest Stability | 2 WareSpace Locations | 200,000 SF
The Twin Cities maintain vacancy rates significantly below national averages, with limited speculative construction providing supply protection.
Metric
Data Point
Overall Vacancy
4.2–5.2%
Absorption (2024)
3.2M SF
Investment Sales
$1.35B+ (highest since 2022)
What’s happening: The Twin Cities maintain overall vacancy of 4.2–5.2% – “significantly below the national average and considered low amongst other Midwest markets” according to Avison Young. Limited speculative construction has helped stabilize conditions.
Investor confidence: Investment sale activity reached $1.35+ billion in 2024 – highest since 2022 – signaling institutional confidence in Twin Cities industrial fundamentals. The market’s stability relative to Sun Belt volatility is attracting capital seeking predictable cash flows.
Section 5: Investment Outlook & Conclusions
The structural case for small-bay industrial is straightforward. The data throughout this report points to the same conclusion: a permanently supply-constrained asset class with durable demand and meaningful downside protection.
This final section summarizes the investment landscape and offers strategic implications for the key audiences evaluating this market.
Capital Is Already Moving
Institutional investors have recognized what the fundamentals show.
Indicator
Trend
Light industrial share of transaction volume
58% (2023) → 62% (2024)
Institutional buyer share
16% (2023) → 23% (Q1 2025)
Small-bay sales vs. pre-pandemic
+32% above average
Big-box sales vs. pre-pandemic
-30% below average
The BKM Capital Partners / Kayne Anderson $1.5 billion joint venture – specifically targeting small/mid-bay acquisitions – signals that major institutional capital now views this as an established asset class, not a niche play.
Cap rates have converged. The historic 50–100 basis point premium for small-bay (reflecting management intensity and tenant credit concerns) has compressed to near-zero. In supply-constrained markets, premium small-bay assets trade at 6.0–6.5% – comparable to self-storage and tighter than softening big-box logistics.
The Competitive Landscape
Co-warehousing has emerged as a distinct category, attracting institutional backing from Cox Enterprises, Fundrise, and others.
Operator
Scale
Model
Differentiation
20+ locations
Vertically integrated owner/operator
On-site GMs at every location, full-service small business infrastructure
12+ locations
Sub-lease
DTC e-commerce specialization
30+ locations (U.S. & Canada)
Sub-lease
Broad geographic reach, 90-day leases
7 locations (NYC, LA, Phoenix, Minneapolis, Orlando, SLC)
Mix of sub-lease and owned properties
Historic building conversions, e-commerce focus
5 locations (LA, Denver, Dallas, SLC, Nashville)
Sub-lease
Month-to-month leases, content studio amenities
WareSpace’s positioning: Vertical integration (owning acquisitions through operations), adaptive reuse expertise (converting obsolete buildings others avoid), and broad tenant focus (serving all small businesses, not just e-commerce) create differentiation in an increasingly competitive category.
Strategic Implications
For Investors
The supply protection is structural and persistent. Construction economics ($160-220/SF (depending where in the country) versus $95-140/SF for big-box logistics) won’t change. Infill land scarcity won’t resolve. The <0.5% construction pipeline relative to existing stock is a structural feature, not a cycle.
Acquisitions beat development. With existing assets trading at 40%+ discounts to replacement cost, acquiring and upgrading vintage buildings generates better risk-adjusted returns than ground-up development. The operators who excel at finding “functionally obsolete” properties and converting them will capture disproportionate value.
Operational expertise is the moat. In a market where you can’t build your way to returns, value creation comes from management: leasing velocity, tenant retention, rent optimization, community building. Multi-tenant operational intensity – historically a deterrent – is now a competitive advantage for specialized operators.
For Small Business Owners
The shortage is real – and not improving. Businesses needing 200–5,000 SF of warehouse space face a structurally undersupplied market. Waiting for “better options” isn’t a strategy; the options aren’t coming. (See Section 3 and Section 5 metro spotlights for market-specific data.)
Flexibility has value. Short-term leases (6–12 months) with all-inclusive pricing may cost more per square foot than traditional industrial, but the total cost of occupancy – including time, risk, and operational overhead – often favors co-warehousing models.
Infrastructure enables growth. Businesses that graduate from garage operations into professional warehouse space consistently report accelerated growth. The constraint isn’t ambition – it’s access to appropriately sized, properly equipped space.
For the Industry
Micro-bay is a distinct asset class. The performance divergence between small-bay (3.4% vacancy) and big-box (7.5%+ vacancy) is too significant to treat these as a single category. Investors, lenders, and analysts should evaluate them separately. And the smaller you go, the tighter it gets: spaces under 10,000 SF (the smallest range of SF studied) have just 3.5% availability and typically lease within 1-3 months.
Adaptive reuse is the supply solution. With ground-up small-bay development uneconomic, the path to addressing undersupply runs through converting existing buildings: obsolete retail, dated office, underperforming industrial. Operators with conversion expertise will drive supply growth.
Co-warehousing is here to stay. The category has achieved institutional validation. The 34.8 million U.S. small businesses that need operational warehouse space – but can’t access traditional industrial – represent a durable demand base that supports continued growth and investment.
The Numbers That Matter
Metric
Data Point
Implication
Micro-bay vacancy (<5K SF)*
~3.5% (proxy)
Structural undersupply
Small-bay vacancy
4.2%
Structural undersupply
Overall industrial vacancy
7.5%
Big-box oversupplied
Small-bay share of inventory
29–36%
Significant existing base
Small-bay share of construction
<2%
No new supply coming
Small-bay rent growth since 2020
+40%
Pricing power confirmed
Acquisition discount to replacement
40%+
Embedded downside protection
Monthly business applications
473,000+
Demand pipeline is growing
Small businesses in U.S.
34.8 million
Massive addressable market
*Industry data tracks sub-10K SF as the smallest segment; micro-bay vacancy is extrapolated from this proxy.
Micro-bay and small-bay industrial real estate has evolved from a fragmented, overlooked niche into one of commercial real estate’s most structurally advantaged segments.
Supply can’t respond. Construction economics, land constraints, and financing challenges ensure that new small-bay development will remain negligible relative to demand. (See Section 2.)
Demand keeps growing. Entrepreneurship at record levels, e-commerce expansion, reshoring momentum, and tariff-driven inventory stockpiling all converge on the same tenant profile: small businesses needing flexible, affordable, operationally functional warehouse space. (See Section 3.)
The gap persists. The vacancy divergence between small-bay and big-box – the largest ever recorded – reflects a fundamental market dislocation that favors owners and operators positioned in the segment. (See Section 4 for metro-level evidence.)
For investors, developers, and operators who understand these dynamics, small-bay industrial offers compelling risk-adjusted returns with meaningful downside protection. For the millions of small businesses struggling to find appropriate space, the operators solving this problem are building something valuable.
The industrial real estate market spent decades ignoring small businesses. That’s created the opportunity. The question now is who captures it.
For more information on WareSpace’s approach to micro-bay industrial, visit warespace.com. To explore available locations, see warespace.com/small-warehouse-rental-locations.
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