If you've been paying attention to commercial real estate over the past five years, you've probably noticed that industrial is the darling of the institutional world. Warehouse and logistics assets have seen cap rate compression, rent growth, and occupancy rates that other sectors can only dream of.
But here's the thing: most of that attention, and capital, has been focused on primary markets. The Inland Empire, Dallas-Fort Worth mega-distribution hubs, and Class A logistics facilities with 500,000+ square feet and investment-grade tenants.
We think the more interesting opportunity is one level down: light industrial and flex space in secondary markets.
What is light industrial?
Light industrial covers a broad category: flex warehouses, small-bay distribution centers, last-mile delivery facilities, contractor yards, and mixed-use industrial spaces that combine office and warehouse under one roof.
These are typically 5,000 to 50,000 square foot buildings leased to local businesses: plumbers, electricians, e-commerce sellers, auto shops, small manufacturers, and logistics companies. They're the backbone of the local economy, and they're chronically undersupplied.
Why secondary markets?
The investment thesis is straightforward:
1. Supply constraints are permanent. Most secondary markets have zoned out new industrial development in favor of residential and retail. The existing stock is aging, and there's almost nothing being built to replace it. When supply is fixed and demand grows, rents go up.
2. Rent growth is accelerating. National industrial rents have grown 8-12% annually over the past three years, but secondary markets are just catching up. We're seeing 10-15% rent bumps on lease renewals in markets like Phoenix, San Antonio, and parts of the Southeast.
3. Tenants are sticky. Light industrial tenants don't move easily. Their businesses are tied to their location: customer base, employee commute patterns, proximity to suppliers. Once a tenant is in place with a triple-net lease, they tend to stay for 5-10+ years. Turnover costs are minimal compared to office or retail.
4. Cap rates are still attractive. While Class A industrial in primary markets is trading at 4-5% cap rates, light industrial in secondary markets can still be acquired at 6.5-8%. That spread represents real value for investors willing to do the work.
The e-commerce tailwind
The shift to e-commerce isn't slowing down. Online retail penetration continues to grow, and every percentage point of shift from brick-and-mortar to online creates demand for warehouse and distribution space.
But the bigger story is last-mile delivery. Consumers expect two-day (and increasingly same-day) shipping, which means logistics networks need to be closer to population centers. Small-bay industrial facilities in suburban markets are perfectly positioned for this trend.
What we look for
Our criteria for light industrial acquisitions:
- Location: High-growth Sun Belt markets with population inflows and job growth
- Size: 10,000-30,000 SF, ideally multi-tenant for diversification
- Lease structure: Triple-net (NNN), where tenants pay taxes, insurance, and maintenance
- Below-market rents: We want existing rents at least 10-15% below market with near-term lease expirations that allow us to mark to market
- Value-add potential: Deferred maintenance, poor management, or vacancy that we can fix
The risk factors
Light industrial isn't risk-free. Environmental issues (prior use as auto shops, manufacturing, etc.) require thorough due diligence. Tenant credit quality can be lower than institutional industrial. And secondary markets can be more volatile in downturns.
We mitigate these risks through conservative underwriting, environmental phase assessments, tenant diversification, and stress-tested financial models.
Where we go from here
We're actively exploring light industrial opportunities in Phoenix, parts of Texas, and the Southeast. If you're a broker or owner with a light industrial property in a growing market, we'd like to hear from you.
Get in touch to start a conversation.