While big box spaces pace, small-bay and mid-size properties gather steam

The next big thing might actually be small. Well, at least smaller than where attention has focused recently in the industrial sector. “I guess first off I should say, we’re in a sector recession right now,” David

, managing partner at Greek Real Estate Partners , told NJBIZ. “The economy is not in recession technically, but the real estate sector certainly is and has been for a while.”

As vacancies and deliveries for projects upwards of 100,000 square feet plateau in the industrial class, the tempering of big-box space opens opportunity for its smaller-scale, multi-tenant counterparts to play catch up.

In the first quarter of 2024, 3.5 million square feet of industrial space was delivered to the New Jersey market, according to JLL. The report noted that under construction product in the sector was at its lowest point in two-and-a-half years.



According to , “There’s been a major slowdown in project starts and there’s been a major reduction in the volume of development sites trading over the last 12 months.”

Despite the adjustments in the sector, New Jersey remains a standout. In the first quarter of 2024, the local market was still one of the strongest nationwide, with a vacancy rate coming in under the national figure.

“[W]e are stronger than most other real estate asset classes at the moment, and particularly in New Jersey, there’s some benefits to being part of a market that is very hard to operate in business-wise,” explained.

Seeing the positive, he referenced the longer timeline to entitle in the Garden State. As a result, “responding to a spike in demand with a spike in supply takes a lot longer in Jersey than it does in other, less land-constrained markets,”

That helps insulate the local market from supply shocks, according to . “And every time we go through a real estate cycle, New Jersey actually shows a little bit more resilience because there’s less developable land here,” he added.

Playing catch-up

In contrast to the large, Class A projects that have dominated recent deliveries, said, "The big falloff in tenant demand has been for the largest blocks of space.”

In the first quarter, NAI James E Hanson reported 4.6 million square feet in year-to-date deliveries to the state’s industrial market. Of that, 69% or 3.2 million square feet remained vacant. Savills also reported in its first quarter look back at the North Jersey industrial sector that inventory built in 2023 and 2024 represented 27% of current vacancies.

Still, NAI Hanson said 12 million more feet are due in 2024.

“All the investment dollars have been focused on big box. The big box has led the market and rent growth for the last decade and smaller space has lagged,” said.

Based in East Brunswick, GREP is a 90-year-old, family-owned and -operated fully integrated developer, owner and operator focused on industrial real estate. Among its portfolio of projects is 600 Linden Logistics Way. The largest building within the Linden Logistics Center is an 840,212-square-foot, Class A warehouse. Meanwhile, at the largest building in the Logan North Industrial Park in Logan Township, 300 Creekview Ave., also from GREP, Target's novel "flow center" occupies more than 1.1 million-square-foot space.

Linden Logistics Center is a 4.1 million-square-foot industrial complex from the partnership of Advance Realty Investors, Real Estate Partners and PGIM Real Estate. - PROVIDED BY CBRE

But GREP also manages a lot of small-bay and mid-size industrial properties. said these spaces range from 5,000 square feet to 100,000 square feet. When it comes to occupants at smaller-sized industrial spaces, he pointed out they’re usually of the community.

“They’re service contractors that might visit their home, might clean their gutters. It might be a local contractor, could be a local bakery. They tend to be more local, more ingrained in their communities,” he explained.

They also tend to produce less truck traffic, a concern that has emerged across the state as industrial development has proliferated. “[N]ot just because there’s less doors, which there is, but because the nature of the businesses inside tend to have a slower velocity of product moving in and out, and particularly it generally correlates, the smaller the tenant, the less truck activity they’ll produce,” explained.

In a brief published on its website last month, New York-based institutional alternative asset manager BlueRock noted these properties typically offer easy access to population clusters. The growth of those populations in turn helps to enhance long-term demand and performance at these assets, according to the company.

“What we’ve seen in that size range is there’s been very little change in the demand from tenants, and there’s not the constraints on willingness to pay or willingness to expand operations in those smaller spaces,” said.

He theorized that as more locally engaged operators, these smaller tenants are not as subject to the vagaries of finance. "The businesses themselves are less exposed to the fluctuations in interest rates,” he said. “So, if they’re still generating business, they can still afford to expand.”

That trend appears to hold true nationwide. CoStar put the national vacancy rate for properties with less than 100,000 square feet at below 4%.

And while larger footprints sit vacant, as of August 2023 the median number of months it took to lease industrial spaces with less than 50,000 square feet fell from 12 to four, according to CoStar. The figure peaked in 2014 at more than 14 months.

In North Jersey, March 2024 CoStar data put the median months to lease for spaces with 10,000 square feet 25,000 square feet at nearly six. For less than 10,000 square feet, it is more than three.

In February, CoStar noted the gap between vacancy rates for big and small spaces was the largest ever recorded by the company.

Changing tides

Bluerock described these spaces with less than 100,000 square feet as “the industrial sector’s best kept secret.”

As put it, “There’s still a very healthy mix of demand versus supply,” in the small-bay spaceand that isn’t expected to change anytime soon. “There hasn’t really been any significant amount of new space delivered there in the last decade, and there’s not really any plan to be delivered immediately. So that gives that smaller space the opportunity to continue growing while that big-box, Class A space takes a breath.”

According to CoStar, industrial properties with less than 25,000 square feet represent 29% of existing U.S. industrial space. Yet in 2024, less than 2% of square feet under construction fit that description.

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In contrast, over the past five years the stock of buildings with more than 100,000 square feet increased by 16%, CoStar said. According to the data, buildings with more than 500,000 square feet grew by more than 25% over the timeframe.

“The smaller spaces are more expensive to build, so the market should be willing to pay more for them if there’s enough demand,” said. “And in order to justify building more small space ... we kind of need that to correct.”

This way, the smaller spaces which lack the appeal of economies of scale and are more expensive undertakings can build a premium to the larger, less expensive to produce spaces, continued. We’re not there yet, he said, but “it’s getting very close and we expect it’ll probably get there within this year.”

He also expects that shift will whet investors’ appetites. “That’s what we’ve been really seeing on the ground and hearing from our investor groups, is if they’re going to invest in industrial this year or next year, they want to do it in a way that meets the existing segment today and that is 300,000-square-foot or less, divisible space with some flexible business plan to it.”

He also anticipates the shift in market focus to small-bay and mid-size space will result in new development in the space, "overtime.”

“And overtime is important. ... It takes time in New Jersey to deliver new product the average entitlement timeline is rarely less than a year; it’s usually two to three years before you can put a shovel in the ground so that does create a lot of lag in responding to demand.”

Referencing Costar Insight data, Bluerock noted a dearth in new supply is helping drive down vacancy rates. As of February 2024, small-bay space (25,000 square feet 75,000 square feet) represented just 5% of industrial square feet under construction.

The 'sweet spot'

For now, “One of the trends that we’ve seen is ... there’s been a number of standalone properties, existing lease properties, that have traded as well as small portfolios that really fit that description of multitenant, diverse local tenant roster in smaller-format spaces,” said. “When existing product has traded over the last year, there’s a very deep bench of bidders looking to buy that product." He said this size segment inspires the most confidence from investors.

While value-add is drawing dollars for now, that interest could be a sign of development down the line.

“There’s definitely people that want to get exposure to it immediately and they’re doing so, buying what little existing product there is here,” said.

In the meantime, he noted some effects. “We’ve been surprised over and over again over the last 12 months as to how many really well-respected, large institutional quality investors are bidding on those type of assets and really pushing pricing well beyond where we expected it to go.”

Greek expects that to result in rents climbing as well. “As the space becomes more institutionalized, there will be more lockstep in terms of increasing rates in those spaces, which will make it easier to justify building something new in that size range,” he explained.

Noting the sub-asset's preference and prevalence within infill and last-mile areas, Bluerock also sees room for rents to rise due to “limited development opportunities.”

To adapt to the changing environment, big box properties are starting to go small, too. Whereas two years ago a 500,000-square-foot building was intended and marketed to 500,000-square-foot users only, landlords are beginning to turn to multitenant opportunities.

Some new projects also incorporate both options. In Mercer County, a redevelopment at the decommissioned U.S. Naval Air Propulsion Center will add large and small industrial space. KRE Group is lead developer on the project, which includes four buildings. One is upwards of 285,000 square feet while the others are three, 20,000-square foot flex structures.

“Given the benefits of the subsector and strength of market fundamentals, the light industrial small bay property type [is] in the ‘sweet spot’ of the industrial real estate revolution,” Bluerock concluded, citing limitation on new supply, the sub-sectors “unique” demand and leasing characteristics, and the focus of capital markets elsewhere before assigning small-bay “our most compelling long-term bullish outlook."

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