Developing, Owning and Operating Shallow Bay Industrial Buildings

Shallow bay industrial buildings serve a broad range of local and regional businesses and can be found in most markets across the United States. Although demand for these buildings has grown steadily over time, their supply has been constrained for many years by limited new construction and the demolition of older buildings. Lenders, institutional investors and developers have generally focused on larger single-tenant buildings that can benefit from economies of scale and serve the growing market for e-commerce logistics.

More recently, a limited supply of new shallow bay buildings has resulted in lower vacancies and higher rental rates than for larger-scale buildings. Consequently, lenders and institutional investors have grown more interested in the building type. The Commercial Real Estate Development Association Research Foundation commissioned this report to examine best practices for investing in, operating and developing shallow bay multitenant industrial buildings. The authors interviewed developers, investors, building owners and architects to explore the challenges and opportunities these buildings present. Key findings from this research include:

• 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.