CoStar Insight: Small-Bay Space Looms Large in Southern California

BKM's buying spree bets on the tightest corner of the industrial market

Hoover Business Park | Garden Grove, CA

Read the full article on CoStar.com.

Vacancy for sub-10,000-square-foot buildings in Los Angeles, Orange County and the Inland Empire has crept up from 2022 lows but remains well below vacancy in larger buildings, a divergence fueling fresh institutional bets on small-bay and multitenant light industrial.

Southern California's smaller industrial buildings remain in high demand. Vacancy for all industrial and flex buildings up to 100,000 square feet stands at 4.3% in Orange County and at 5.7% in both Los Angeles and the Inland Empire. That puts the Southern California total at 5.4%, elevated relative to the sub-2% cycle lows, but still tighter than what tenants and investors encounter up the size curve.

Sub-50,000-square-foot vacancies are limited

In Orange County, the gap is striking. Vacancy for buildings under 50,000 square feet registers under 4%. It's still relatively low, around 6%, for buildings in the 50,000-to-100,000-square-foot range, but an elevated 13% in the 100,000-to-250,000-square-foot and 250,000-to-500,000-square-foot categories. The rate for that last category has more than doubled since the start of 2024 as speculative big-box deliveries collided with softening demand in third-party logistics.

The pattern reflects a shift in the demand backdrop. The e-commerce tailwind that powered record absorption of large distribution space has faded, while smaller users, including light manufacturers, contractors, suppliers, last-mile operators and the long tail of small businesses that anchor SoCal's economy, continue to lease infill space at a healthier clip.

That dynamic is what's keeping Mason Waite, senior managing director of asset and portfolio management at BKM Capital Partners, leaning in.

"Industrial vacancy is very small. It's really hard to get a sub-50,000-square-foot space vacant," Waite said in an interview. "That gives us continued conviction around the tenant base. Post-COVID rents were running crazy, and they haven't continued at that pace, but we're still seeing positive momentum on rents, even in this slowdown in the cycle from tariffs and price pressure."

Asking rents for available buildings under 50,000 square feet in Orange County listed on CoStar average $1.61 per square foot, still trending near record levels and stabilizing more recently. Market rents are well above pre-pandemic levels, having expanded by more than 20% in the past five years.

Reinforcing a strong outlook, development has slowed considerably. Construction of industrial buildings under 100,000 square feet in Southern California has dropped nearly 80% from its high point to a decade-plus low of 1.6 million square feet.

"Nothing is being built. It's too expensive, it doesn't pencil," Waite said. "And the check size for these businesses is smaller, so the rent is more manageable. There's always a lower-cost alternative, so our thesis is to provide a nice product and invest heavily in it, paint, signage, roofs, and more efficient layouts. A lot of these buildings haven't been invested in on the interiors; the floor plans are funky. It's a hands-on, efficiency-build approach."

A multibillion-dollar vote of confidence

BKM's recent purchase activity backs that thesis. In early June, the Newport Beach-based firm and joint venture partner Kayne Anderson Real Estate closed on a light-industrial portfolio comprising 8.5 million square feet in 275 buildings in 51 parks acquired from Blackstone subsidiary Link Logistics for $1.81 billion. About 37% of the portfolio sits in Southern California, with a concentration in Orange County.

The roughly 1.2 million-square-foot Orange County slice of the portfolio was held by Link Logistics for an average of 6.2 years and was less than 3% vacant, with spaces leasing in under two months at rents near $1.90 per square foot, modified gross. Link remains a top-five owner of smaller industrial buildings in Southern California, while Rexford and Prologis top the list.

"SoCal is our backyard," Waite said. "We had existing assets in LA and in San Diego, and this rounds it out. Each metro has its own underlying driver. San Diego has defense, aerospace is booming, and a lot of those tenants have already lived in small business parks. Their underlying contracts and square footage needs have just gone up.”

Three weeks later, BKM followed up with a $95 million purchase of the 429,000-square-foot Carson Industrial Center, an 11-building campus in LA's South Bay submarket, earmarking more than $6 million for repositioning.

Waite noted that new capital is flowing into the segment, citing recent industry events and a wave of new research coverage, and that BKM is increasingly seeing fresh names on bid sheets. The firm itself has expanded eastward, adding recent exposure in Texas, Florida and Atlanta to complement its West Coast core.

Positive outlook for supply–demand fundamentals

The small-bay market in Southern California remains on solid ground. Its low vacancy among buildings under 100,000 square feet compares favorably to the national average, and the construction pipeline has thinned. With big-box vacancy in most pockets still elevated, investors are more active in the sub-100,000-square-foot range.