Small-Bay Industrial: The Underrated Powerhouse of the E-Commerce Era?

E-commerce has transformed consumer behavior, logistics, and supply chains at an unprecedented pace. What began as a niche alternative to traditional retail has evolved into a dominant force reshaping nearly every aspect of the economy. This shift has had profound implications for industrial real estate, fueling demand for logistics and distribution space in ways few could have predicted.

While much of the focus in recent years has been on large-scale fulfillment centers, a more nuanced trend has emerged: small-bay industrial properties are outperforming the broader industrial market. These properties—typically under 250,000 square feet and located near population centers—are becoming critical to modern logistics strategies, particularly as companies prioritize faster delivery times, operational flexibility, and supply chain resilience.

Why E-Commerce Needs More Industrial Space Than Ever

The scale of e-commerce’s impact on industrial real estate cannot be overstated. Global online retail sales are expected to surpass $8 trillion by 2028, and with e-commerce requiring three times more logistics space than traditional brick-and-mortar retail, the industrial sector has undergone a structural transformation.

Historically, large distribution centers and regional fulfillment hubs were the backbone of e-commerce logistics. But consumer expectations for near-instant delivery have shifted priorities toward last-mile distribution, intensifying demand for smaller, well-located industrial properties that can facilitate quick shipping and efficient inventory turnover.

BKM Capital Partners’ latest white paper, The Ripple Effect of E-Commerce: The Case for Light Industrial, explores this shift in depth, highlighting the divergence in performance between large-format warehouses and small-bay industrial properties. While big-box industrial has seen rising vacancies and oversupply challenges, small-bay assets remain highly competitive due to their scarcity and strategic locations.

The Competitive Edge of Small-Bay Industrial

Several factors are driving the rising demand for small-bay industrial space:

• Prime Locations for Last-Mile Delivery: Urban last-mile delivery volume is expected to grow 78% by 2030, reinforcing the need for infill logistics space. Small-bay properties offer strategic locations that enable retailers and logistics providers to meet same-day and next-day delivery expectations.
• Supply Constraints Keep Fundamentals Strong: New construction of small-bay properties is severely limited by zoning restrictions, land costs, and high construction expenses. This keeps vacancy rates historically low, even as economic conditions fluctuate.
• Diverse Tenant Demand: Logistics firms, third-party logistics providers, and retailers adopting omnichannel strategies now account for 30% of industrial leasing activity nationwide. These tenants prioritize location and adaptability over sheer warehouse size, making small-bay industrial an ideal fit.

Technology is Accelerating the Shift

E-commerce growth isn’t just about volume—it’s about efficiency. Advances in automation, artificial intelligence, and drone delivery are revolutionizing supply chains, making proximity and adaptability more valuable than ever. Small-bay industrial properties, particularly those in infill locations, provide the flexibility needed to integrate new logistics technologies faster than larger, more rigid warehouse operations.

Sustainability is also becoming a major driver of change. ESG-focused strategies, including energy-efficient warehouses and carbon-neutral supply chains, are increasingly shaping investment and leasing decisions. While retrofitting large distribution centers can be costly and time-consuming, smaller industrial properties often allow for more seamless adoption of green technologies, making them even more attractive to tenants and investors alike.

What’s Next for Small-Bay?

E-commerce’s continued expansion ensures that industrial real estate will remain one of the most in-demand asset classes. While large fulfillment centers will continue to play a role, the shift toward faster, more localized logistics solutions will keep small-bay industrial at the center of supply chain strategy.

With strong fundamentals, limited new supply, and evolving logistics requirements reinforcing the value of these properties, small-bay industrial is well-positioned to remain a top performer in the years ahead.