Shallow-Bay CRE: Not Just for Industrial Anymore

Over the past several years, one of the most consistent shifts within commercial real estate has been the blurring of traditional lines between retail and industrial space—particularly in the small-bay and shallow-bay segment of the market.

Historically, retail and industrial properties served clearly defined purposes. Strip centers emphasized visibility and consumer access, while industrial space prioritized operational efficiency. Shallow-bay space, in particular, was largely driven by economics. It was traditionally viewed as lower-cost space, offering functional layouts at rents below most other property types.

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That economic foundation still matters, but it no longer fully explains the depth and breadth of demand shaping the market today.

A broader and more diverse tenant base

What has changed most meaningfully is the diversity of tenants gravitating toward shallow-bay space. Based on transaction activity and advisory experience, demand is no longer limited to traditional industrial or service users. Instead, shallow-bay properties are increasingly accommodating businesses shaped by evolving consumer behavior, service delivery models and the way e-commerce continues to influence how space is used.

Small businesses, local distributors, light manufacturers, contractors, last-mile logistics and e-commerce users are driving demand for shallow-bay space. These tenants want flexible, affordable, infill industrial space close to people and population.

Over the past five years, SRS Real Estate Partners has financed shallow-bay deals occupied by pickleball facilities, CrossFit gyms, micro-breweries, artist studios, pool and spa showrooms, ghost kitchens, churches, schools, and bakeries, among others. These tenants do not fit neatly into legacy real estate categories, yet they consistently seek out the same type of space—flexible, adaptable, and operationally efficient, with the ability to support some level of customer interaction.

At the end of the day, everything consumers purchase from a retail store or online, was previously in a warehouse. Over time, consumers have become accustomed to and are expecting to receive or attain their purchase quickly. Speed to market is key, which is driving and increasing last-mile, shallow-bay warehouse demand.

This trend is not theoretical. It’s unfolding transaction by transaction. As this tenant universe expands, it’s reshaping how shallow-bay assets are positioned, leased, and ultimately valued.

Location still matters—but differently

Another shift is how location is being evaluated within the shallow-bay category. While these tenants are not typically chasing hard-corner retail exposure, location has not become irrelevant. Instead, it has become more nuanced.

Shallow-bay product is typically infill and closer to urban labor pools and customers, which helps attract occupiers and investors.

In practice, tenants tend to favor sites that are easy to access, close to residential density, and near established commercial corridors—even if they are not directly on them. Shallow-bay properties that strike this balance tend to resonate with a wider range of users, particularly those with a customer-facing component that does not justify full retail rents.

As these deals are underwritten and financed, location quality within the shallow-bay segment increasingly influences tenant demand and leasing outcomes, even when absolute visibility is not the primary driver.

Rent growth through convergence

Rent growth for shallow-bay product continues to outperform and outpace other asset classes, including a 40 to 50 percent increase in rental rates since COVID.

As the tenant base broadens, rent dynamics are evolving alongside it. What the market is experiencing is not a wholesale redefinition of shallow-bay space, but a gradual convergence in rent potential driven by competition from a growing set of uses.

When more tenant types can utilize the same space effectively, landlords gain flexibility. In supply-constrained markets, that flexibility is translating into improved pricing power and rent growth that looks very different than it did historically.

Capital markets perspective

From a capital markets standpoint, these shifts are increasingly reflected in pricing. In the transactions SRS has executed, well-located flex and shallow-bay assets are drawing strong investor interest, supported by their versatility and broad-based demand.

Cap rates have compressed as investors underwrite these assets with a greater emphasis on adaptability and re-tenanting potential. The ability to accommodate a wide range of uses—often without significant reconfiguration—has become a central component of how these properties are evaluated.

As additional demand drivers continue to emerge, this flexibility positions shallow-bay assets to deliver meaningful performance supported by rent growth and long-term relevance.

Cap rates for shallow-bay product have compressed as institutional and private capital have moved and rotated toward this niche due to the stable cash flow and limited supply. The diversified income stream reduces risk compared to a single tenant big-box warehouse.

A structural evolution

The convergence taking place in shallow-bay real estate is not something the market views as cyclical or temporary. It reflects deeper changes in how services are consumed, how businesses operate and how physical space is expected to function in a digitally influenced economy.  What was once valued primarily for being inexpensive is increasingly being valued for what it enables.

John Darrow is executive vice president, debt & equity at SRS Real Estate Partners. Shannon Johnston is vice president, industrial services.