The Outlier in a Softening Industrial Market

As discussed in one of Site Selection Group’s recent blogs, the United States has now experienced three consecutive years of rising vacancy across the industrial real estate market. The national vacancy rate has climbed to approximately 7.6%, with overall availability (including space under construction) reaching roughly 9.6%. This marks a meaningful shift from the pandemic-era environment, when unprecedented demand and limited supply drove vacancies to historic lows.

While the broader narrative suggests that the industrial market is softening, shallow bay industrial properties remain a notable exception. With limited new supply and continued rent growth, tenants are increasingly competing for available space, while investors continue to prioritize this asset class.

This divergence highlights fundamental differences in tenant demand, development economics, and leasing dynamics that favor smaller industrial spaces.

The Contrast in Vacancy

Despite strong investor interest in shallow bay properties, developers have largely moved away from building them. Since the pandemic, most institutional developers have focused on constructing larger logistics and distribution facilities.

Several factors have driven this trend:

• Economies of scale that favor larger distribution centers
• Simpler property management for single-tenant buildings
• Large institutional tenants that typically sign longer-term leases

At the same time, several structural challenges make shallow bay development more difficult:

• Demand is strongest in urban infill locations, where land costs are significantly higher
• Zoning constraints increase the closer a site is situated to dense population centers
• Smaller buildings make it harder for developers to achieve construction economies of scale

The result is a growing divergence in vacancy trends. Industrial buildings under 50,000 square feet currently have a national vacancy rate below 5%, with an average time on market of roughly five months. By contrast, larger distribution buildings over 100,000 square feet have vacancy rates exceeding 9%, with average marketing times of eight months or longer.

What is Driving Tenant Demand

Strong tenant demand continues to keep vacancy in shallow bay properties well below the broader market average. One key factor is the size of the tenant pool. The number of potential users for spaces under 100,000 square feet is far greater than the relatively limited number of large national tenants that typically occupy new speculative distribution facilities.

Shallow bay properties often serve tenants such as:

• Contractors and construction-related businesses
• Light manufacturers
• Service companies
• Regional distributors
• Small and mid-sized e-commerce operators

Many of these buildings were constructed decades ago on the outskirts of cities but now sit in highly desirable infill locations as metropolitan areas have expanded. These locations provide critical advantages for businesses seeking:

• Proximity to customers
• Faster delivery times
• Lower transportation costs
• Access to a nearby labor force

Additionally, shallow bay buildings tend to offer flexibility and speed to market. They typically include functional loading, adequate utilities and modest office space—features that meet the operational needs of many small and mid-sized businesses without requiring significant retrofitting.

What is Attracting Investors

Both individual and institutional investors have increasingly gravitated toward shallow bay assets. The most obvious driver is the consistent demand profile, which results in lower vacancy risk.

The tenant base is broad, and the limited pipeline of new construction suggests these favorable supply-demand dynamics are likely to persist.

Another advantage is the risk diversification inherent in multitenant properties. When a tenant vacates a large single-tenant building, the property can suddenly become 100% vacant. In contrast, shallow bay buildings typically house multiple tenants, meaning turnover from a single occupant may only create 5–10% vacancy, reducing overall income volatility.

Finally, limited inventory and strong demand have supported above-average rent growth. With few alternatives available, landlords often have greater pricing power, allowing them to achieve rental rates that exceed the broader industrial market average.

Conclusion

The resilience of shallow bay industrial properties ultimately comes down to basic supply and demand fundamentals. A large and diverse tenant base, combined with limited new development and the stability of multitenant buildings, creates a durable demand foundation that keeps vacancy rates low.

Meanwhile, the large-format warehouse segment remains more sensitive to economic cycles, development pipelines, and the expansion decisions of a relatively small group of national tenants.

While the broader industrial market may be softening, shallow bay properties continue to stand apart—leaving smaller tenants facing limited availability, rising rents, and increasing competition for space.