BKM Capital Partners on How Smaller Industrial Spaces Offer Bigger Returns

A surge in small-bay demand is reshaping industrial real estate and pushing capital toward operationally intensive platforms, says BKM's Brian Malliet.

As factories become more agile and companies shift away from massive formats located closer to consumers, the way industrial space is operated is evolving, explains Brian Malliet, chief executive, chief investment officer and founder of BKM. As a result, operating platforms, rather than assets alone, are becoming a primary driver of value-add investing around the world.

What structural changes in supply chains and tenant demand are driving the move from traditional big-box warehouses to smaller, light-industrial formats?

What has really changed is how much space manufacturers actually need. Processes that once required 300,000 square feet can now be done in 20,000 square feet or less. Advances in microchips, sensors, robotics and automation have completely altered the factory model. You no longer need massive facilities filled with raw materials and long production cycles. Today, goods can often be produced and shipped within 24 hours.

At the same time, supply chains have become more localized. Trade tensions, tariff uncertainty and reshoring have pushed companies to rethink global sourcing and rely more heavily on domestic production. That creates demand not just from manufacturers themselves, but from suppliers, service providers and downstream users that support those operations. Those users tend to occupy smaller, flexible spaces rather than large, single-tenant facilities.

Small business formation has reinforced that shift. Over the past few years, the US has averaged more than five million new small business applications annually, well above pre-pandemic levels. Those businesses typically prioritize proximity to customers, labor pools and transportation infrastructure over scale.

When you combine that with last-mile logistics and same-day delivery expectations, demand moves decisively toward infill, light-industrial formats. The leasing data reflects that reality–today, the majority of industrial leases are under 50,000 square feet, and much of the activity is concentrated well below that threshold.

From an operator’s perspective, what makes light industrial fundamentally harder to run than big-box warehouses?

It really comes down to volume. Light-industrial portfolios operate at a completely different cadence than big-box warehouses. We are not managing a handful of long-term leases; we are managing thousands of tenants with shorter lease terms and constant turnover. Roughly one-third of the tenant base resets over a three-year cycle.

That level of transactional intensity changes how the business has to be run. Leasing, renewals, tenant improvements, credit monitoring and facility management are all happening continuously, often across dozens of properties at the same time. When you are operating at that scale, small missteps compound quickly. A delayed buildout, a missed renewal window or a slow response to a tenant issue does not just affect one lease; it ripples across the portfolio.

Despite that pace, retention can still be strong if the operation is set up correctly. We maintain roughly a 75 percent retention rate. When tenants do leave, we can typically turn space and re-lease it within 30 days. That speed matters. In a business with this much churn, downtime is the enemy, and execution must be tight.

The tenant base itself also looks very different from big-box industrial. Instead of relying on a few large corporate tenants, you are diversified across hundreds of small and mid-sized businesses. While churn is higher, exposure to any single tenant is much lower. Many of these tenants are owner-operated, multi-generational, family-run businesses for whom the space represents their core livelihood, not a satellite location. For most of them, this is their only location. That creates a level of staying power that is often underestimated.

Flexibility is also crucial. Tenants expand and contract as conditions change, and maintaining occupancy and net operating income requires being able to reconfigure space quickly and pragmatically. Managing that process is a bit like a jigsaw puzzle in that you are moving tenants up or down in size, reshuffling layouts and keeping occupancy high without getting hung up on rigid lease structures. In light industrial, contraction is just as important as growth when it comes to managing change.

Why are established operating platforms becoming more critical in light-industrial real estate compared with the big-box era?

Because you cannot solve that level of complexity with capital alone. Once you are dealing with a high volume of tenants, short lease terms and constant turnover, execution becomes the value driver.

Operating light industrial at scale requires systems, people and repeatable processes. You need institutional-grade reporting, reliable vendor networks and deep local market knowledge. Without that infrastructure, the transactional volume quickly becomes overwhelming and small inefficiencies start to erode performance.

To put the operational burden in perspective, we executed more than 600 leases and roughly 1,200 tenant improvement contracts in a single year. Managing that volume consistently requires purpose-built systems and teams. At BKM, that includes business intelligence, 135 employees across 16 offices and a technology stack designed to manage leasing, construction and property operations in real time.

We began building BKM Intel, our own proprietary artificial intelligence/business intelligence tool, in 2013, long before this segment attracted widespread institutional attention. We now use the platform as our primary driver of data visibility, tracking leasing activity, rent trends, renewal timing, tenant credit, maintenance and capital projects across all of our submarkets. That allows us to make informed decisions about when to push rents, who to target for renewals and how to prioritize capital. It also helps us anticipate tenant expansion or contraction before it becomes a problem.

In the big-box era, once a building was leased, it largely ran itself. Light industrial does not work that way; it requires continuous decision-making, and platforms that can execute at that level consistently outperform.

How has the fragmentation of light-industrial assets changed the economics of acquisition, leasing and asset management?

Fragmentation is one of the defining characteristics of the light-industrial sector, and it affects every stage of ownership. The market is still dominated by small, sub-institutional owners, many of which have held assets for decades. That ownership base has historically limited reinvestment, standardization and portfolio-level strategy.

At the same time, nearly all industrial development since covid has been concentrated in big-box facilities, even as demand from smaller users has accelerated. That has created a persistent supply-demand imbalance in light industrial.

To put that in context, BKM acquired approximately $1.3 billion of assets last year and $1.1 billion the year before by consolidating fragmented portfolios into institutional platforms. Those same dynamics carry through to leasing and asset management. Without daily operational focus, decisions become reactive, capital gets deferred and asset quality erodes over time.

When assets are aggregated into a scaled operating platform, that equation flips. Standardized leasing, consistent capital investment and data-driven decision-making allow fragmentation to become a source of value rather than a constraint.

Over the next five years, do you expect consolidation among light-industrial operators, or will capital accelerate?

Consolidation is inevitable, and it is already happening. A lot of groups have been attracted to the space by recent performance, but many underestimate how hard it is to scale. Managing hundreds of leases, constant turnover and ongoing capital projects requires far more infrastructure than most expect.

We have seen investors try to build operating platforms from scratch, only to realize how quickly headcount and systems need to grow. I recently spoke with a larger investor who thought they could operate with a team of 15 underestimating how hard it is to scale. Managing hundreds of leases, constant turnover and ongoing capital projects requires far more infrastructure than most expect.