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Resilience and Opportunity in Multi-Tenant Light Industrial Real Estate

Author

Katherine Peach
November 16, 2024

The Foundation of Stability Amidst Uncertainty

Multi-tenant light industrial real estate stands as a beacon of stability in turbulent economic times. As highlighted in BKM Capital Partners' latest whitepaper, this niche asset class has consistently demonstrated resilience through major disruptions like the Global Financial Crisis, COVID-19 pandemic, and the recent rapid interest rate hikes. With strong fundamentals and an ability to adapt, the sector continues to be a cornerstone for investors seeking risk-adjusted returns.

Economic Headwinds and Sector Resilience

In 2023, the industrial real estate sector faced challenges such as increased supply, normalizing tenant demand, inflationary pressures, and elevated financing costs. Despite these hurdles, multi-tenant light industrial properties maintained high occupancy and steady rental growth, underscoring their durability.

Key factors contributing to this resilience include:

  • Inflation Protection: Short-term leases allow landlords to adjust rents to market rates quickly.

  • Diverse Tenant Base: No overreliance on a single industry or tenant.

  • Infill Locations: Close proximity to urban centers ensures robust demand.

The whitepaper identifies three major tailwinds that continue to drive the growth of light industrial real estate:

  1. E-Commerce Expansion
    The growth of online retail has spurred demand for warehouses and distribution centers. For every $1 billion increase in e-commerce sales, approximately 1.2 million square feet of industrial space is required.

  2. Manufacturing Onshoring
    With global supply chain disruptions, companies are investing heavily in U.S.-based manufacturing facilities, supported by government incentives like the CHIPS Act. This trend is creating a "halo effect," boosting demand for nearby small-bay industrial spaces.

  3. Supply Chain Reconfiguration
    Businesses are optimizing their logistics networks to ensure resilience and efficiency, increasing the need for well-located industrial properties.

Investment Opportunities in a Tight Market

The market for small-bay properties is becoming increasingly competitive due to limited new construction and high demand. Properties under 100,000 square feet have some of the lowest vacancy rates in the industrial sector, below 4% nationally. Rent growth in this segment has been exceptional, with a 50%-90% cumulative increase over the past three years in certain markets.

For investors, now is a strategic time to act. Key opportunities include:

  • Upgrading underperforming assets to meet tenant demand.

  • Leveraging short-term leases for rent growth in inflationary environments.

  • Investing in markets with high barriers to entry, ensuring long-term value appreciation.

Looking Ahead

The multi-tenant light industrial sector is positioned for continued growth and stability. As economic uncertainties persist, this asset class offers a unique combination of resiliency and upside potential. Investors willing to embrace its nuances can achieve outsized returns while mitigating risks.

Source: For a deeper dive into the dynamics of this market, explore the full whitepaper on BKM Capital Partners' website.

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