Why Small-Bay Industrial Is Outperforming Multifamily: A Conversation with Chris Hanson

In a recent conversation on the Directed IRA podcast, Hanson Capital’s Managing Partner, Chris Hanson, was invited to discuss a topic that has become increasingly relevant for real estate investors:

Why industrial, and more specifically small-bay industrial, is attracting capital while other asset classes face pressure.

The discussion covered more than a simple comparison between industrial and multifamily. It explored how supply dynamics, tenant behavior, and capital structure shape outcomes across asset classes.

Rather than approaching the topic from a theoretical standpoint, Hanson framed the conversation through direct operating experience – from single-family investments following the 2008 cycle to multifamily scale and ultimately to a focused strategy in multi-tenant industrial assets across the Sunbelt.

What follows is a structured version of that conversation, edited for clarity and organized around the key themes that matter most to investors evaluating where to allocate capital today.

From Multifamily to Industrial

Host: You’ve been involved across multiple asset classes. How did you ultimately land on industrial?

Chris Hanson: We started like a lot of operators did coming out of the last cycle – buying single-family homes after the 2008 downturn. From there, we scaled into multifamily and built a fairly large portfolio.

Over time, we began to notice a shift in where the best risk-adjusted opportunities were. Multifamily became increasingly competitive, cap rates compressed, and supply started to build in a meaningful way.

At the same time, we saw a segment of the industrial market that wasn’t getting the same level of institutional attention – small-bay, multi-tenant assets in infill locations.

That’s where we focused.

What “Industrial” Actually Means

Host: When you say industrial, what exactly are you referring to?

Chris Hanson: It’s a broad category, and that’s where a lot of confusion comes in.

Most people think of large distribution warehouses. What we focus on is small-bay industrial – spaces typically between 1,000 and 25,000 square feet.

These are used by local businesses. Contractors, service providers, light manufacturing, last-mile distribution. Businesses that need to be close to their customers.

Demand is driven by function, not speculation.

Tenant Economics and Demand Stability

Host: What makes those tenants different from, say, multifamily renters?

Chris Hanson: The biggest difference is how rent fits into their financial model.

In multifamily, rent can be 25% to 40% of a tenant’s income. That makes it highly sensitive to affordability pressures.

In small-bay industrial, rent is often only 3% to 5% of a business’s revenue.

That changes behavior.

If you’re running a business out of a space that supports your operations, your customer base, and your revenue, you’re much less likely to move over incremental rent increases.

That creates stickiness.

Supply Constraints Are Structural

Host: What about supply? We hear a lot about industrial development.

Chris Hanson: Most of the new supply is in large-format logistics.

Small-bay is different.

Nationally, we saw supply grow less than 2% over the past 5 years for inventory in small-bay products, while larger industrial assets have seen growth north of 25% in the same time frame.

It’s harder to build. Zoning is restrictive. Land is scarce, especially in infill locations.

So you have steady demand and limited new supply. That imbalance tends to persist.

How Hanson Identifies Opportunities

Host: How do you actually find and underwrite these deals?

Chris Hanson: We’re typically looking for two things at acquisition.

First, pricing below replacement cost.

Second, rents that are below market.

If we can buy an asset where we’re not competing with new development, and we have the ability to mark rents over time, that creates a clear path to value.

It’s not dependent on the market doing something extraordinary.

It’s based on execution.

A Real Example: Phoenix Industrial Portfolio

Host: Can you give an example of how that plays out?

Chris Hanson: We recently sold a portfolio in Phoenix that illustrates this well.

We acquired multiple small-bay industrial properties between 2020 and 2021. Across those assets, we focused on lease-up, tenant placement, and bringing rents to market levels.

Over time, that translated into higher income and stronger asset values.

In the second tranche of that portfolio sale, we turned about $9 million of equity into $34 million of proceeds. That resulted in a roughly 4.0x equity multiple and a 35% IRR.

Those outcomes were driven by operational improvements applied consistently across multiple assets.

Financing and Capital Structure

Host: How does financing play into your strategy?

Chris Hanson: It’s a major component.

We structure debt to match the business plan. If you’re executing a value-add strategy, you need time for leases to roll and income to stabilize.

If financing is too short or too aggressive, you can end up forcing a refinance or sale before the plan is complete.

We try to avoid that.

The goal is to maintain flexibility so decisions are made based on opportunity, not necessity.

Thinking About Risk

Host: How do you think about downside risk?

Chris Hanson: We start with a simple question – how do we lose money?

If we’re buying below replacement cost and below market rents, we’ve already created a margin of safety.

From there, we look at tenant diversification, lease rollover schedules, and how resilient demand is in that specific location.

We’re not underwriting best-case scenarios. We’re underwriting what happens if things don’t go as planned.

Multifamily vs Industrial Today

Host: How do you compare industrial to multifamily in today’s market?

Chris Hanson: Multifamily still has strong long-term demand, but it’s facing near-term pressure in a lot of markets.

You’ve had a significant amount of new supply delivered, particularly in the Sunbelt. That’s pushed vacancy up and led to declining rents. When rents are going down, values are going down, and we don’t see a need to rush back into buying while those conditions persist.

Industrial, especially small-bay, hasn’t seen the same level of supply.

At the same time, demand remains consistent because it’s tied to local business activity.

So the dynamics are different.

A Note on IRA Investing

Host: For investors using self-directed IRAs, how does this fit?

Chris Hanson: It can be a powerful tool, but structure matters.

Certain types of income can trigger tax implications like UBIT if not structured properly. That’s why it’s important to work with advisors who understand both the real estate and the tax side.

The underlying investment still needs to make sense. The structure should support it, not complicate it.

Strategic Takeaway

The conversation around real estate investing often centers on asset classes.

But the more important consideration is how those assets behave under different conditions.

Small-bay industrial and multifamily operate under different supply constraints, tenant dynamics, and value creation mechanisms. Understanding those differences is critical when allocating capital.

For Hanson Capital, the shift toward multi-tenant industrial has been driven by a focus on durability, diversification, and the ability to create value through execution.

Work With Hanson Capital

Hanson Capital specializes in private equity real estate investments focused on high-scarcity industrial assets, disciplined underwriting, and long-term value creation. The firm works with accredited and institutional investors seeking durable income, downside protection, and strategic growth – including 1031 exchange solutions and passive ownership structures.

If you’re curious about how our approach could fit into your portfolio,  schedule a call to connect with our team. We’d love to talk through what we’re seeing and where we’re going next.