Q3 2025 Light Industrial Market Update: Small-Bay Surges While Big-Box Stalls
- BKM Capital Partners
- 2 days ago
- 3 min read
Updated: 18 hours ago
BKM Capital Partners’ latest market update reveals why underbuilt, tenant-driven small-bay assets are outperforming across leasing, investment, and rent growth
Newport Beach, CA – October 28, 2025 – Industrial real estate isn’t moving in one direction anymore. While big boxes are dealing with rising vacancies and soft demand, small-bay industrial is outperforming across several metrics. That’s the central takeaway from the newly released Q3 2025 Light Industrial Market Update by BKM Capital Partners, a vertically integrated institutional fund manager specializing in multi-tenant light industrial real estate.
While large-format warehouses face rising vacancies and softening demand, buildings under 100,000 square feet remain in short supply and high demand among both tenants and investors. BKM’s latest analysis shows that vacancy in the small-bay segment has held steady at approximately 4.5% over the past four quarters, roughly half the rate seen in larger facilities.
Despite concerns over industrial overbuilding, supply growth in this segment has totaled just 2.3% since 2019, while new construction starts are down 33% year-over-year. As tenant demand holds firm and, in some cases, accelerates, the small-bay sector is projected to outperform in both rent and occupancy figures through the end of the decade.
“Vacancy is climbing where supply outpaced demand, but small bay was never part of that story,” said Brian Malliet, founder, CEO and CIO of BKM Capital Partners. “These assets are purpose-built for flexibility and tenant diversity, and they’re located in markets where supply simply can’t catch up. That’s what keeps them in demand.”
Investor behavior reflects that shift: transactions under $100 million now account for 70% of all industrial sales volume, signaling capital rotation into the smaller industrial subsectors. Cap rates for small-bay properties have compressed to meet or even exceed those of bulk warehouses, a reversal that underscores growing institutional conviction.
Operationally, leasing activity remains heavily concentrated in small-bay space, with more than 90% of 2025 leases signed for spaces under 100,000 square feet, and an average lease size of 40,000 square feet. BKM’s portfolio achieved leasing spreads of 25.25% in Q2, propelled by rent growth across infill assets supporting logistics, e-commerce, and light manufacturing tenants.
National demand drivers continue to fuel the trend. E-commerce reached a record 24.1% share of total U.S. retail spending in Q1, while manufacturing footprints have grown by 32% annually since 2019, driven by reshoring and supply chain regionalization. The result is consistent demand for flexible, strategically located industrial product that can’t be easily replicated.
Key Findings from BKM’s Q3 2025 Update
Sub-100K SF vacancy is 4.5% vs. 9.4% for larger buildings
Construction starts are down 33% YoY
70% of industrial sales are under $100M
BKM achieved YoY leasing spreads exceeding 25.25%
E-commerce accounts for 24.1% of U.S. retail sales, a record high
Small-bay supply has grown just 2.3% since 2019 vs. 10% in big-box
Two key metros reinforce small-bay growth trends:
Dallas-Fort Worth: With vacancy at 6.3% for buildings under 100K SF and employment up 24% since 2015, DFW has overtaken Los Angeles as the second-largest industrial market in the U.S.
Atlanta: Small-bay product commands a 13.7% rent premium over the market average, with 81% of YTD 2025 leases taking up less than 100,000 square feet and limited new construction in the segment.
“Industrial real estate is shifting from a story of expansion to one of precision,” Malliet added. “Capital is learning that the most reliable growth comes from assets that are impossible to replicate: infill, small-bay properties where tenant demand never truly softens and operational control matters most. That’s the space we’ve built our platform around.”
The Q3 2025 Light Industrial Market Update is part of BKM Intel, the firm’s ongoing research series and thought leadership platform.
