In the world of commercial real estate investing, resilience is a prized attribute—especially during economic downturns when many property types face declining occupancy, reduced rental rates, and challenging refinancing conditions. While no real estate asset class is completely immune to economic cycles, small-bay multi-tenant industrial properties have consistently demonstrated remarkable stability and outperformance during market contractions. At Phoenix Industrial Redevelopment (PIR), our strategic focus on this specialized property type is no accident—it’s based on observing how these assets weather economic storms compared to their larger counterparts.
Diversified Tenant Risk: The Built-in Insurance Policy
Perhaps the most compelling advantage of small-bay industrial properties in a downturn is their inherent tenant diversification. Consider the difference between a 100,000-square-foot building occupied by a single tenant versus the same building divided into twenty 5,000-square-foot units with different tenants.
In the single-tenant scenario, if that tenant fails during a downturn, your occupancy instantly drops to 0%, and your rental income disappears completely. The property immediately transitions from a performing asset to a significant liability, with continuing mortgage payments but no offsetting revenue.
In contrast, the multi-tenant property with twenty smaller tenants presents a fundamentally different risk profile. If one tenant fails, your occupancy drops just 5%, and 95% of your rental income continues. Even if four tenants (20%) fail during a severe downturn, you still maintain 80% occupancy and the majority of your rental income. This built-in diversification creates a natural buffer against the most severe impacts of economic contractions.
Small Business Tenants: Agility in Action
Small-bay industrial spaces typically house small and mid-sized businesses—the backbone of the American economy and often the most adaptable segment during challenging times. Unlike large corporations that may take months to adjust strategies or implement cost-cutting measures, smaller businesses can pivot quickly, adapting their operations to changing market conditions with remarkable agility.
This tenant profile creates another layer of downturn resistance. During the 2008-2009 financial crisis, for example, we observed that many of our small manufacturing and service tenants were able to rapidly adjust their business models, reduce overhead, and maintain operations even as larger companies were announcing widespread layoffs and facility closures.
Small business owners also frequently have their personal wealth tied to their business success, creating powerful incentives to persevere through difficult times rather than default on lease obligations. Many will take extraordinary measures to keep their businesses afloat—including forgoing personal salaries or seeking additional capital infusions—rather than face business failure.
Lower Tenant Improvement Costs and Shorter Downtime
When tenant turnover does occur in a small-bay property, the financial impact is typically less severe than in larger industrial spaces. The cost to refurbish and re-tenant a 2,000-square-foot industrial space is relatively modest compared to preparing a 50,000-square-foot facility for a new occupant.
Additionally, smaller spaces typically require less customization, making them attractive to a broader range of potential replacement tenants. This translates to shorter vacancy periods, reduced carrying costs, and faster restoration of rental income—a critical advantage during periods when capital preservation is essential.
Lower Rental Rates and “Flight to Affordability”
During economic downturns, we often observe a “flight to affordability” among industrial tenants. Larger businesses look to reduce their space footprint and associated costs, often seeking smaller, more affordable facilities. This trend can actually increase demand for small-bay multi-tenant properties during challenging times, creating a counter-cyclical advantage.
The absolute rental cost for small-bay spaces is also significantly lower than for larger facilities, even if the per-square-foot rate is higher. In a downturn environment where cash flow preservation becomes paramount for businesses, monthly rent of $2,500 for a 2,500-square-foot space is often more manageable than $25,000 for a 25,000-square-foot space, even if the per-square-foot rate is identical.
Stable Local Service and Manufacturing Base
Small-bay industrial parks frequently house businesses providing essential local services—automotive repair, construction trades, local distributors, and small-scale manufacturers serving regional markets. These businesses often demonstrate remarkable staying power during downturns because their services remain necessary regardless of broader economic conditions.
A plumbing supply company, HVAC contractor, or local food distributor may see reduced volume during a recession, but their core services continue to be required by the communities they serve. This creates a foundation of stability that helps maintain occupancy through economic cycles.
Lower Price Points and More Accessible Financing
From an acquisition and ownership perspective, small-bay industrial properties typically have lower absolute price points than their larger counterparts. A 50,000-square-foot multi-tenant property might trade for $7.5 million at $150 per square foot, while a single-tenant property of similar size could command $10 million or more.
This lower price point creates broader market liquidity even during downturns, as the pool of potential buyers remains larger. Additionally, smaller loan amounts associated with these properties are often more readily available from local and regional banks, even when national lenders may be restricting capital for larger commercial investments.
The PIR Advantage in Navigating Downturns
At Phoenix Industrial Redevelopment, our focus on small-bay, multi-tenant industrial properties is central to our investment thesis and has been validated through multiple economic cycles. Our portfolio of properties, typically in the 20,000 to 100,000 square foot range with individual tenant spaces from 1,000 to 5,000 square feet, provides both downside protection during market contractions and substantial upside potential during recovery periods.
This strategy forms the foundation of our FixedFunds Program®, which offers accredited investors the opportunity to participate in the stability and growth potential of this resilient asset class. With fixed returns of 8.0% annually on our Income Notes or compounded returns through our Growth Notes, investors can access the performance advantages of small-bay industrial real estate without the complexities of direct ownership.
For investors seeking 1031 exchange opportunities, our 1031Funds Program® provides exposure to these same advantages through a Delaware Statutory Trust structure, offering a 5.0% preferred return plus 50% participation in property appreciation upon sale.
Conclusion: Resilience Through Cycles
As we navigate the ever-changing economic landscape, the resilience of small-bay, multi-tenant industrial properties remains a compelling investment thesis. Their inherent diversification, tenant adaptability, lower re-tenanting costs, and stable local service tenant base create multiple layers of protection against downside risk.
For investors seeking stable returns with significant inflation protection and recession resistance, small-bay industrial properties deserve serious consideration as a cornerstone of a diversified real estate portfolio. Through economic expansions and contractions alike, these properties have demonstrated a remarkable ability to preserve capital while positioning investors for substantial appreciation during recovery phases.
To learn more about how you can participate in the small-bay advantage through the PIR FixedFunds Program® or 1031Funds Program®, please visit our website or contact our investment team today.
