PERE Keynote Interview: The Rise of Small-Bay Industrial
A value-add approach to small-bay industrial properties can harness secular changes in the US economy, say BKM Capital Partners' Brian Malliet and Brett Turner.

For much of the past decade, the industrial sector has been the darling of commercial real estate, with high-tech logistics warehouses serving as the poster child for the asset class. During that same period, California-based BKM Capital Partners focused in on the once niche but now nationally important small-bay industrial sector.
Brian Malliet, the firm’s founder, chief executive officer and chief investment officer, and Brett Turner, senior managing director of acquisitions and dispositions, say their practice of repositioning infill light industrial parks in the Western US has evolved to capitalize on secular changes in the economy.
Q: What distinguishes small-bay industrial from the broader industrial real estate sector?
Brian Malliet: The broader industrial sector can be divided into three segments: small-bay, mid-bay, and large-bay.
Everybody knows about the big-box warehouses, which are 500,000 square feet and up and are occupied by one or two larger tenants.
Mid-bay is somewhere between 200,000 and 500,000 square feet with between five and 20 tenants.
Small-bay is generally 200,000 square feet and less, with usually 20 to 100 tenants occupying units within the property.
We operate about 75-85 percent in the small-bay space and the remainder of our business is in the mid-bay space, in what we call light industrial or multi-tenant industrial.
Brett Turner: This product type lends itself to the 47 percent of America that is employed by small businesses. As a result, you have a more diversified tenant base than big-box industrial, which is primarily occupied by larger third-party logistics firms.
Q: What industries do these tenants represent?
BM: There are three secular changes driving significant tenant demand for small-bay industrial. One is e-commerce, which is driving demand for shipping and processing efficiencies through distribution space like sorting facilities for same-day deliveries.
The second is technology and innovation; the growth of memory storage on the chip has brought a slew of new companies that use advanced manufacturing machinery and need space to house it. The third is manufacturing.
We are seeing more manufacturing jobs opening up in the US today than any time since the 1930s. This includes 3D printing, production on-demand and similar uses. With these advancements, manufacturing can now be done in 5,000-15,000-square-foot facilities, rather than the typical 300,000-square-foot facilities.
Q: What is needed to bring small-bay properties up to current market rents?
BM: There is a complete value-add process that takes place, where about 10 percent of the purchase price is invested to reposition the asset over roughly a 12-month period. Our tenants are heavily employee-based, so they want a nice facility to attract and retain talent. They also want a facility they are proud of to attract customers. We drastically change the paint scheme, install drought-tolerant landscaping, upgrade the parking lots, and replace all the signage, just to name a few things. The difference is night and day, and helps not only to attract new tenants but retain existing tenants with the park’s new image.
BT: This is a hard product to manage. If you are a private individual or if you are a major institution, paying attention to the constant churn of tenants is very difficult, and it is very easy to fall behind. Historically, operators have focused solely on maintaining or lowering rental rates, rather than investing in capital improvements that then drive rents. That is why so many owners have missed the opportunity to mark their rents to market.
Q: What does the opportunity set look like in this small-bay sector?
BT: The locations are mainly infill, so obviously that puts pressure on the land price. These buildings also represent a very inefficient use of the land compared with other industrial types. Light industrial typically has around 30 percent coverage, whereas big box is closer to 50 percent. Then you add the actual construction materials to make all the storefronts, bathrooms and demising walls in a multi-tenant industrial park; it all drives up the cost tremendously and creates a higher development barrier.
BM: In a big-box space, you have one set of bathrooms, one set of offices, one set of electrical panels. At a light industrial property, you could have 20 sets of entrances, 20 sets of bathrooms, 20 sets of electrical panels, etc. This inevitably drives the cost higher on a per-square-foot basis as opposed to the big box spaces.
Light industrial is the largest industrial sector by square footage, representing 40 percent of the overall supply in any given city. There is huge demand coming into our space, but zero development because it costs too much. We can still buy small-bay product for about 35-40 percent less than what it costs to build today.
Q: So, how can investors and managers drive returns in this space?
BM: What we have found is that there is a huge inefficiency in the light industrial market. The surge in demand for this kind of space combined with the difficulty to develop new product has led to significant rent growth in recent years, including back-to-back years of 30 percent year-over-year growth in 2021 and 2022, followed by 12-plus percent rent growth in 2023 and again in 2024.
Because of this growth, there are properties that are 50, 60 or 70 percent under market. BKM seeks to identify those buildings and bring them up to market rents, rather than try to project rent growth into the future. It is a very different way of buying real estate. With this approach, we have bought $1.4 billion worth of property across 26 deals in 2024.
BT: There is also the backdrop of a significant amount of federal stimulus money about to hit businesses. Three years ago, Congress approved $2 trillion in the Infrastructure Investment and Jobs Act, though nothing has been built yet. Two years ago, they approved the $52 billion CHIPS Act, and again, not a single semiconductor plant has been opened yet. They approved the $500 billion Inflation Reduction Act to build electric vehicle plants, but not a single EV plant has actually been completed.
All of this money is still making its way through the pipeline, and our tenants have a bullseye on their forehead for that stimulus money. So, on top of all the historical rent growth, the case for future growth is strong as well.
Q: How have institutional investor sentiments toward small-bay industrial changed over time?
BM: We started in 2013, and nobody wanted to listen to us. It was far easier to make money in the big-box space at the time, and nobody found the fast-paced nature of the light industrial space attractive.
Fast forward five years and big-box base returns have started to come down as the space has become more competitive.
When cap rates fell below 5 percent in the big box space, money shifted to seek out returns, namely toward the mid-bay and the small-bay space. Blackstone came in three years ago and bought PS Business Parks, Public Storage’s business parks and light industrial division, for $7.6 billion. That portfolio sale covered 30 million square feet across 110 assets. So, in late 2021, everybody finally started to notice light industrial’s potential.
Since then, we’ve been in the process of raising our third fund, which is a $400 million raise. We raised about $400 million of private equity on the joint-venture side last year and we have done about $300 million on the private equity side this year, as well. All the big players that were in the big-box space are now trying to figure out how to get into the light industrial space. People are certainly no longer hesitant to invest in what we do.
Q: With all the planned acquisitions in the sector, do you also see opportunities for exits?
BT: Yes, there really is opportunity for both sales and acquisitions. We are buying heavily for our Fund III and we are in the midst of monetizing our Fund II. Over the course of 2024, more and more institutions entered the space.
As the year went on, capital increasingly flowed into industrial. At the beginning of the year, we saw $20 million to $30 million transactions. By the middle of the year it was $75 million to $125 million transactions, and in the closing weeks of 2024 we worked on a deal that was more than half a billion dollars.
Q: How might widespread tariffs in the US impact small-bay industrial tenants?
BM: Whether there are tariffs or no tariffs, manufacturing is going to take place. International tariffs will probably boost manufacturing even further in the US. If we were in the third-party logistics space or the big-box space, I think there would be more of a concern there. But because our tenant base is concentrated in innovation, technology and manufacturing, we do not see any headwinds coming our way.
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