Shallow bay industrial buildings – long overlooked in favor of larger, single-tenant logistics facilities – are drawing renewed attention from institutional investors and lenders as constrained supply and resilient tenant demand set the stage for continued outperformance, according to a new report from the Commercial Real Estate Development Association Research Foundation (formerly the NAIOP Research Foundation).

The report, Developing, Owning and Operating Shallow Bay Industrial Buildings, draws on interviews with more than two dozen developers, investors, lenders and architects to examine best practices for acquiring, operating and developing this niche segment of the industrial sector.

Among the report's key findings:

• Multitenant shallow bay industrial buildings serve a diverse range of local and regional businesses, making them less sensitive than larger logistics facilities to booms and busts.
• Demand for shallow bay space is usually greatest near population centers and transportation thoroughfares. Higher land costs in these locations and higher per square foot construction costs for smaller buildings have limited new construction of this product type.
• Many investors in the shallow bay space focus on buying vintage properties and marking their rents to market or retrofitting them to attract higher rents. Although the volume of new shallow bay construction has been limited, developers report making profitable investments in ground-up shallow bay projects where there is adequate demand.
• Developing strong tenant relationships is particularly important for effectively managing shallow bay properties. Close cooperation between property management and leasing teams can help owners retain tenants and improve decisions on rental rates and capital expenditures.
• To strike the right balance between a project’s density, functionality and costs, it is critical for developers of new shallow bay buildings to understand prospective tenant needs. Not all tenants need deep truck courts or 32-foot clear heights, but a denser site plan and lower-cost design can permanently limit a building’s marketability.

"Shallow bay industrial has quietly become one of the most resilient corners of our industry," said Marc Selvitelli, CAE, president and CEO of the Commercial Real Estate Development Association. "Lenders and institutional investors are taking notice, but this report is a reminder that success in this space depends less on chasing the trend and more on disciplined underwriting and strong tenant relationships."

The report is authored by Dustin C. Read, Ph.D., J.D., Thomas J. Bisacquino/CREDA Distinguished Fellow and head of the Blackwood Department of Real Estate at Virginia Tech, and Aaron Spitz with Deloitte’s Government and Public Services consulting practice.

The full report is available at credaresearch.foundation.