As real estate investors, we’re always searching for opportunities that combine strong fundamentals with compelling market dynamics.
Right now, we’re seeing a fascinating contrast between two traditionally reliable asset classes: multifamily housing and shallow bay industrial properties.
While multifamily has long been considered a defensive asset class, current market conditions present some challenges. According to recent data, multifamily construction hit a 50-year high in 2023, with approximately 943,000 units under construction at the end of Q3 (CBRE, 2023). This surge in supply, combined with cooling demand and rising interest rates, has led to increased vacancy rates and downward pressure on rents in many markets.
In contrast, shallow bay industrial properties – typically multi-tenant facilities with units between 1,000 to 25,000 square feet – are experiencing remarkably different dynamics. These properties currently maintain vacancy rates around 2%, less than half the average across all industrial segments. This scarcity isn’t likely to change soon, as new construction in this sector remains limited due to higher construction costs and land constraints in prime infill locations.
The fundamentals supporting shallow bay industrial are particularly compelling:
- Tenant Diversification: Unlike multifamily properties which often face concentrated move-out periods, shallow bay industrial typically houses diverse businesses with staggered lease terms, providing more stable cash flow and reduced vacancy risk.
- Rising Demand: The explosion of e-commerce and last-mile delivery needs continues to drive demand for these smaller, strategically located spaces. Research indicates that last-mile delivery demand is projected to increase 78% globally by 2030.
- Limited New Supply: While multifamily is experiencing significant new inventory, shallow bay industrial remains underbuilt. Many existing properties are actually being redeveloped for other uses, further constraining supply.
- Rent Growth Potential: Many shallow bay properties are owned by longtime holders who haven’t kept pace with market rates, creating opportunities for meaningful NOI growth through strategic repositioning and professional management.
What makes this particularly interesting is the timing. As the Federal Reserve continues to make rate cuts into 2025, real estate values broadly should benefit from cap rate compression. However, shallow bay industrial stands to gain additional appreciation from the strong supply-demand imbalance and operational upside potential.
This isn’t just theoretical – we’ve seen it firsthand. In a recent Phoenix project, we were able to create over $10 million in value in just 24 months through strategic improvements and bringing rents to market rates, even during a challenging interest rate environment.
While multifamily will undoubtedly remain a crucial part of many investment portfolios, current market conditions suggest shallow bay industrial may offer superior risk-adjusted returns for investors seeking both stability and growth potential. The key is finding properties with the right fundamentals in markets with strong demographic and economic tailwinds.
*Sources: CBRE Research Q3 2023, World Economic Forum, Cushman & Wakefield Industrial MarketBeat Q4 2023*
