National industrial vacancy reached 7.5% in Q3 2025, but small-bay industrial under 50,000 SF sits at just 3.4% nationally with only 0.3% of stock under construction. Small-bay rents have surged over 40% since 2020.
The overall U.S. industrial vacancy story is one of rising rates from historic lows. National industrial vacancy reached 7.5% in Q3 2025, rising for 11 or more consecutive quarters, and hit 7.6% in Q4 2025. Other methodologies report a higher 9.6% in January 2026, up 160 basis points since January 2025. Industry forecasts project vacancy could reach 8.6% by year-end 2026, with a peak anticipated in mid-2026.
Small-bay industrial (under 50,000 SF) tells a fundamentally different story. Vacancy for sub-50K SF properties sits at just 3.4% nationally, roughly half the overall industrial rate. Consistently reported between 3% and 5% throughout 2024 to 2025, this segment remains near pre-pandemic lows. Properties under 150,000 SF show vacancy of approximately 4.2% versus 7.4% for larger industrial. Critically, only 23 million SF of small-bay industrial is under construction nationally, equaling less than 0.3% of stock, the lowest in decades.
Rents Are at Record Highs With Small-Bay Outperforming Dramatically
National in-place industrial rents reached $8.94 per SF in January 2026, up 5.1% year-over-year. However, year-over-year market rent growth has decelerated sharply, from 6.9% in 2023 to 2.8% in 2024 to just 1.3% in Q3 to Q4 2025, the lowest since 2012. The spread between new leases and in-place rents is $2.22 per SF nationally, with the highest premiums in Bridgeport ($4.64 per SF), Miami ($4.02), Seattle ($3.87), and New Jersey ($3.81).
Flex space commands a significant premium over warehouse. In the Raleigh-Durham market, flex space averages $17.46 per SF versus warehouse at $9.08 per SF, a roughly 2-to-1 premium that is typical nationally. Small-bay rents have surged, as documented in our analysis of industrial development trends and the small-bay investment case. Rents have surged over 40% since 2020, compared to approximately 30% for the broader industrial market. Small-bay asking rents are at record highs in many markets. High construction costs and land prices make new small-bay development economically challenging, as developers struggle to profit on 1,000 to 5,000 SF bays at current market rents.
Cap Rates Have Expanded but Remain Favorable for Small-Bay Assets
Industrial cap rates have expanded approximately 150 basis points from the 2021 to 2022 all-time lows of roughly 4.5%. The national industrial cap rate stood at 6.2% in Q4 2025, with model-based analysis suggesting a potential fair-value cap rate of 6.0%. Other industry sources report cap rates in the high-6% range, up 80 to 130 basis points from 2022 depending on property type. By class, Q1 2025 cap rates were Class A at 4.84% and Class C at 6.71%. Smaller infill and small-bay assets outperformed, with investors accepting lower cap rates due to stable occupancy and rent growth. The average sale price for small-bay properties is $104 per SF, up 55% since 2020. Industry projections call for cap rates to compress 5 to 15 basis points across most industrial property types in 2026.
Total Inventory Exceeds 20 Billion SF With a Massive Construction Pullback
Total U.S. industrial stock sits at approximately 20 billion SF or more. Between 2020 and 2024, more than 2.5 billion SF of industrial space was built, with 1.4 billion SF delivered in 2022 to 2024 alone. Approximately 7 billion SF of existing industrial space is used for manufacturing.
The construction pipeline has contracted sharply from its peak of approximately 1 billion SF under construction in Q3 2022. As of January 2026, 355.7 million SF remains under construction. Construction starts in 2024 totaled 236 million SF, a 35% drop from 2023 and 60% or more decline from 2022. Q2 2025 starts hit 52.6 million SF, the slowest pace since Q1 2015. Deliveries are expected to reach a decade low in 2026, with only roughly 200 million SF expected. For small-bay specifically, only 0.5% of existing stock is under construction, while smaller industrial properties are being built at nearly the same pace as the 2022 to 2023 peak, suggesting developer preference is shifting toward this undersupplied segment.
Net Absorption Is Recovering but Remains Well Below Pandemic-Era Peaks
Net absorption has normalized dramatically from the e-commerce-driven boom years. Full-year 2024 net absorption totaled 170.8 to 203.1 million SF, the lowest annual rate since 2011. In 2025, absorption improved modestly to 166.1 to 176.8 million SF, though Q2 2025 saw negative 11.3 million SF, the first negative quarter since 2010. Q4 2025 showed improvement with positive absorption resuming.
Tenant Demand Is Driven by E-Commerce, 3PLs, and 34.8 Million Small Businesses
E-commerce continues to be the primary structural driver. E-commerce share of total retail sales (excluding autos and gas) hit a record 23.2% in Q3 2024, expected to reach 25.0% by year-end 2025. E-commerce requires approximately 3 times as much warehouse space per dollar of sales as brick-and-mortar retail. For every $1 billion increase in e-commerce sales, approximately 1.2 million SF of industrial space is required. The global last-mile delivery market is valued at approximately $175 billion in 2025, projected to exceed $375 billion by 2033.
Third-party logistics companies account for approximately 35% of overall industrial leasing activity in 2025. 3PL companies increased space demand by 12.8% year-over-year while traditional retailers reduced by 16.7%. The 100K to 300K SF range is most preferred by 3PL occupiers.
Small businesses underpin flex space demand: 34.8 million small businesses (fewer than 500 employees) represent 99% of all U.S. firms, employ 46% of private-sector workers, and account for 61% of net new job creation since 1995. Key flex occupiers include contractors, HVAC, plumbing, electrical, auto repair, and artisans. The average industrial lease size declined 7.7% to approximately 68,000 SF in 2024, reflecting a structural shift toward smaller users.
Small-Bay Transactions Now Account for 62% of Industrial Deal Volume
Total industrial investment sales reached $65 to $69 billion in 2024, up 10% to 14% year-over-year. Full-year 2025 volume held at $68.4 billion across 4,257 sales and 523.7 million SF, with an average price of $133.68 per SF, up 9.2% from 2024's $122.46. Other tracking shows industrial as the largest CRE sector by dollar volume at $44.9 billion, up 54.4% year-over-year. Q1 2025 transaction volume rose 25% year-over-year, with deals in the $50 million to $100 million range up 37% and $100 million or more mega-deals tripling in volume.
Small-bay properties dominate the transaction landscape. Properties under 150,000 SF accounted for 62% of industrial transaction volume in 2024 (up from 58% in 2023), with institutional buyers representing 20% of these purchases (up from 16%). In Q2 2025, small-bay transactions in the $5 million to $25 million range totaled approximately $5.9 billion. Owner-user transactions exceeded $1 billion in late 2024 to early 2025, accounting for 34% of Q1 2025 volume.
Reshoring Ambitions Face a Reality Check but Manufacturing Demand Is Structural
The 2025 Reshoring Index delivered a reality check: the index score fell by 311 points after two positive years, with the Manufacturing Import Ratio rising 9% as imports from Asia increased 10% versus U.S. manufacturing output growth of just 1%. However, the real estate impact is real: manufacturing-related site selection engagements increased 350% or more since 2018, with manufacturing demand accounting for approximately 20% of overall requirements in 2024, expected to grow to 30% by 2028. Manufacturing construction spending reached $237 billion annualized in July 2024, up 86% from two years earlier.
Over 350,000 jobs were reshored in 2022 (up 25% from 2021), with approximately 800,000 total U.S. manufacturing jobs added from reshoring in the last five years. The CHIPS and Science Act provides approximately $53 billion in incentives for U.S. semiconductor manufacturing plus a 25% tax credit for qualifying manufacturing investments. Surveys find 63% of companies considering reshoring to the U.S., though only 10% have taken specific action.
Conversions Are Accelerating as Office Space Is Demolished Faster Than It Is Built
For the first time in 25 or more years, more U.S. office space is being demolished or converted than built: 23.3 million SF removed versus 12.7 million SF delivered in 2025. In 2024, 94 office conversion projects totaling 13.1 million SF were completed, with roughly 68 conversions (12.8 million SF) expected in 2025. A pipeline of 309 conversion projects is planned or underway, 73% residential in nature, projected to yield 38,000 housing units. Almost 25,000 apartments were completed from adaptive reuse in 2024, up 50% or more from 2023. The total conversion pipeline includes 78,500 office-to-residential units and 31,000 industrial-to-residential units.
Implications for Feasibility and Valuation
Flex and light industrial presents perhaps the most compelling risk-adjusted return profile in commercial real estate. While headline industrial vacancy is rising toward 8% to 9%, the small-bay segment below 50,000 SF operates in a fundamentally different market with vacancy half the overall rate, rent growth outpacing the broader sector by 10 or more percentage points since 2020, and a construction pipeline of just 0.3% of existing stock. The institutionalization of small-bay investment, now 62% of industrial transaction volume, confirms this segment's structural advantages are being widely recognized even as the broader industrial market digests its post-pandemic supply wave. For feasibility analysis, the critical quality divide between modern and legacy product demands granular assessment: post-2022 construction absorbed over 200 million SF while pre-2000 product returned over 100 million SF in 2024. Location, clear height, and functional utility have become the dominant differentiators in a market where new small-bay supply is effectively constrained by economics.
For lenders and investors evaluating projects in this sector, UnionMetric provides independent SBA feasibility study services that meet SBA and USDA requirements.
Sources
- CoStar/Plante Moran, U.S. Industrial Real Estate Market Reports, Q2-Q4 2025
- BKM Capital Partners/CoStar, Small-Bay Industrial Vacancy and Supply Data, 2025
- CommercialEdge/Yardi Matrix, National Industrial Report, February 2026
- NAIOP, Industrial Space Demand Forecast, Q3 2025
- Lee & Associates/Corebridge Financial, Small-Bay Industrial Investment Report, 2025
- Marcus & Millichap, 2026 Industrial Investment Forecast
- CBRE, 2025 Industrial and Logistics Outlook
- JLL, Q4 2025 U.S. Industrial Market Report
- Kearney, 12th Annual Reshoring Index, 2025
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Michael Rodriguez, MAI, CCIM
Certified commercial real estate appraiser with extensive experience in industrial property valuations across the United States.
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