Not All Small Bay Is Actually Small Bay

Jeremiah was recently on a panel at the Small Bay Summit in Atlanta alongside some of the most active operators and capital allocators in the small bay industrial space. It was a real conversation, and he didn't hold back.

One thing he made clear: not all Small Bay is actually Small Bay.

That sounds obvious until you've closed on a park expecting clean rectangular bays and end up with mixed roof heights, specialized buildouts, and deferred maintenance that wasn't in the underwriting. The kind of deal where execution takes longer and costs more than the pro forma assumed.

We've been open about those early lessons because they've directly shaped how we underwrite complexity risk today.

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The Market Is Strong — But Misclassification Is the Real Risk

The fundamentals behind true small bay industrial are as compelling as any asset class in commercial real estate right now. According to CBRE, shallow-bay vacancy sat 2.5 percentage points below the overall industrial vacancy rate by early 2025, and asking rents have climbed more than 50% above 2010 levels.

On the supply side, only 23 million square feet of small bay space is currently under construction nationwide — less than 1% of existing inventory, per BKM Capital Partners. For context, buildings smaller than 25,000 square feet represent 29% of all existing U.S. industrial space but less than 5% of new deliveries, per Matthews Real Estate.

The demand side is equally compelling. Employment in industries that rely on small bay space — construction trades, wholesale trade, auto repair, light manufacturing — grew 3.8% year-over-year through Q1 2025. That gap does not close overnight.

But here is what the data does not tell you: strong market fundamentals do not protect you from buying the wrong product. The biggest risk in this space right now is misclassification — operators labeling heavy office flex or mid-bay warehouse as "small bay" and then discovering they don't have the criteria, systems, or experience to manage what they actually bought.

That's the conversation Jeremiah came to have on stage, and it's the one worth having here.

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What True Small Bay Actually Means

When we talk about small bay industrial at Patriot Holdings, we mean something specific:

• Sub-5,000 SF suites
• Rectangular buildings, metal or CMU construction
• Standardized floor plates, no custom fit-outs
• No subdivision required — the space must be conforming and re-lettable as-is
• Minimal office component, 20 to 30 percent maximum
• No single tenant representing more than 20 to 25 percent of the rent roll
• Buildings between 50,000 and 150,000 SF, priced between $5M and $20M per asset

The tenant profile matters as much as the physical asset. Contractors, tradespeople, light manufacturers, e-commerce operators. Businesses that typically cannot go fully remote, do not want to move often, if ever, and often renew because relocation disrupts their operation more than a potential rent increase.

We believe this diverse tenant base spanning contractors, light manufacturers, distributors, and local service providers creates natural portfolio resilience, as Basis Industrial notes in their analysis of the asset class.

The moment a deal drifts toward heavy office buildout, complex tenant improvements, specialized infrastructure, or unit sizes that require reconfiguration to re-let, it stops being small bay in our eyes. It becomes flex industrial or office flex — a different product with different management demands, longer leasing timelines, and a different risk profile entirely.

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The Lessons That Shaped Our Buy Box

We've been deliberate about sharing the deals that didn't go according to plan, because those are the ones that actually built our underwriting discipline as our partners know it.

One acquisition outside Boston is a good example. The park looked right on the surface — rectangular exterior buildings, grade-level doors, reasonable basis. What wasn't fully accounted for was a large middle building with inconsistent roof heights, specialized tenant buildouts left behind by prior occupants, and roof penetrations throughout.

Getting existing tenants out took close to two years. Permitting, TI negotiations, leasing commissions, and months of limited income followed.

That experience, along with others, led to where our acquisition criteria sits today. If we have to redesign a space to re-let it, we don't buy it. That's not a preference. It's a hard rule.

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The Three Pitfalls That Blow Up Underwriting

These show up in nearly every small bay deal that underperforms.

Subdivision and reconfiguration. Splitting a space to re-let it means permits, MEP redesign, construction cost, and lost rent — all before you collect a dollar of income. One deal in Connecticut required three separate permits and a new zoning review on a 20,000 SF space. Eighteen months passed before the first tenant moved in. Buy assets where the space is already conforming.

MEP and electrical costs. These are chronically underestimated, particularly when individual metering is required per unit. Sub-meters cap at 60 amps in many configurations, and tenants in trades and light manufacturing routinely need more. Power upgrade costs can flip a deal from green to red faster than almost any other line item.

Permitting timelines. Operators may see the rent roll but miss the clock. A vacant unit with a specialized buildout in the Northeast can mean six to twelve months of permitting before construction starts, followed by free rent, leasing commissions, and then actual income. According to CBRE, nearly half of all shallow-bay inventory was built prior to 1980 and more than 80% before 2000 — meaning deferred maintenance and complex existing buildouts are the norm, not the exception. If the permitting timeline isn't in your underwriting, your projected returns likely aren't real.

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How We Think About Acquisitions Today

Our focus is on established business parks in demand-driven markets across the Northeast, Mid-Atlantic, Carolinas, and Texas. Population and employment density matter more to us than geography labels. We want to be where small businesses and trades operators are already active and growing.

We are yield investors, not developers. Existing assets with in-place cash flow, a real rent roll to underwrite, and below-market rents with a defensible mark-to-market opportunity give us a clear path to value. Our current five-year fund structure — deploy in years one and two, stabilize and exit by year five — makes stabilized acquisitions the right match for our risk profile.

One lane that remains less competitive is the $6M to $8M purchase range in strong suburban markets. Institutional capital largely ignores deals at that size. Local buyers often overprice them. Transactions in the small bay space between $5M and $25M totaled nearly $5.9 billion in Q2 2025 alone — but volume concentrates at the higher end, leaving the lower range less competitive for disciplined buyers.

A fully occupied, 40-plus tenant park in Fairfield, Connecticut closed for us in late 2024 because it was overlooked, not hidden.

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Discipline Is the Strategy

There is always a deal that almost fits the box. Great market. Attractive basis. A relationship you trust. But a heavy office component, or a buildout that requires capital and time you didn't underwrite.

Jeremiah talked about one of those on stage — a deal near Washington, DC that checks nearly every location box and did not pass our acquisition criteria. There is a reason we sent out $600M in LOIs in Q4 2025, and only closed on approximately $15M. We are selective for a reason.

BKM Capital Partners reported that small bay vacancy held steady at approximately 4.5 percent over the past year, even as broader industrial vacancy ticked upward. The market rewards patience. The operators who build durable portfolios are not the ones who do the most deals. They're the ones who stay inside their criteria when the pressure to stretch is highest.

A deal maker buys outside their box. A portfolio architect doesn't.

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Watch the Full Panel

Jeremiah went deeper on all of this at the Summit — deal sourcing, scaling operations, building a team, and what the market looks like right now for buyers who know what they're after.

Watch the Full Panel Recording

We'll also be in New York City at the end of the month. Jeremiah is speaking on a panel covering the early lessons that shaped our investment philosophy, how we transitioned from operator to institutional platform, and the trends informing our buy box today.

If you're an operator, partner, or allocator in the area and want to connect while we're in town, we'd value the time.

Patriot Holdings is a real estate investment and operating company focused on true small bay industrial across the Northeast, Mid-Atlantic, Carolinas, and Texas. Founded by Jeremiah Boucher, the firm targets stable, cash-flowing business parks through its active Fund V deployment.