Lee & Associates recently contributed market expertise to the CREDA Research Foundation's national study, Developing, Owning and Operating Shallow Bay Industrial Buildings. The study examines why this often-overlooked segment has attracted growing investor attention and what owners, developers and lenders need to understand about it.

The national study provides an important framework, but Pennsylvania demonstrates why shallow-bay industrial deserves to be evaluated at the state, regional and submarket levels. Its tenant base, aging inventory, constrained new supply and highly varied local markets create a distinct set of opportunities and risks.

 

What the CREDA study shows

Shallow-bay industrial buildings serve a broad range of local and regional businesses, including contractors, service providers, light manufacturers, wholesalers and smaller distributors. These tenants often need a combination of warehouse, production, storage and modest office space, but not the scale or specialized infrastructure of a national logistics operation.

That tenant profile creates different demand fundamentals from the large-box market. Shallow-bay demand is closely tied to population, employment, customer locations, suppliers and established business relationships. Because the buildings support essential day-to-day operations, well-located properties can maintain durable demand across economic cycles.

The CREDA study also highlights a persistent supply challenge. Land and construction costs, limited economies of scale, community opposition and competition from larger industrial projects have constrained new shallow-bay development. The result is a market in which existing, well-located buildings can be difficult to replace.

Those national findings point to a broader lesson: shallow-bay industrial should not be analyzed simply as smaller big-box industrial. Location, functionality, tenant fit, leasing and operating discipline matter as much as building size.

 

Pennsylvania is a market of its own

Pennsylvania is a useful case study for applying the national framework. The state has a large existing shallow-bay inventory, a significant base of older buildings and multiple population and employment centers with different economic histories and operating needs.

The state is not one shallow-bay market. Individual, local markets have different supply profiles, tenant bases, transportation patterns and development conditions. Differences within each region can be just as important as differences between regions.

 

The Pennsylvania market by the numbers

A large and aging inventory

Pennsylvania is estimated to have approximately 444 million square feet of shallow-bay space, with roughly 73% of that inventory built before 2000. The age profile reflects both the durability of the product and the difficulty of replacing it.

New shallow-bay development is often difficult to justify as a stand-alone project. Land and construction costs can be high, while smaller buildings do not benefit from the same economies of scale as large industrial facilities. In some cases, new shallow-bay space is delivered as part of a larger development where shared infrastructure, site work and overall project scale improve the economics.

Constrained supply and durable demand

Pennsylvania's shallow-bay market remains relatively tight. Statewide direct vacancy is below 5%, and several major markets are performing below that level. Western Pennsylvania recorded approximately 4.3% vacancy in the second quarter, while Lehigh Valley and Central Pennsylvania were both below 3% and Metro Philadelphia stood at 4.2%.

Newer buildings are currently performing somewhat better than older inventory. Buildings constructed before 2000 have a direct vacancy rate of approximately 5.4%, compared with 4.1% for buildings built after 2000. Even so, older properties can remain highly competitive when they offer the right location, functionality and tenant fit.

 

Location remains the foundation

Shallow-bay properties perform well when they are located near the businesses and people that support them. Highway access, labor availability, customer proximity and connections to other markets all matter.
Pennsylvania benefits from a strong transportation network and established population centers. Central Pennsylvania, for example, sits within a four-hour drive of more than 50 million people and provides access to major markets stretching from Washington, D.C., to New York City.

The state's industrial history is also an advantage. Many Pennsylvania population centers developed around manufacturing, distribution and trade. That history has helped create an experienced labor base and a local business ecosystem that continues to support industrial demand.

 

Opportunity requires discipline

Institutional investors have shown increased interest in shallow-bay industrial, including through the acquisition of multiple small-bay portfolios throughout the region over the past 2 years.

There is still opportunity for local and regional owners, particularly where they can identify operational or pricing upside. Asking lease rates have increased nearly 30% since 2020 in Pennsylvania, creating value-add potential for properties that are under-managed, under-marketed or leased below current market levels. Sale prices per square foot for the state have increased nearly 50% over the same period, while market cap rates have generally moved into the 7% to 9% range.

That environment makes careful underwriting essential. Investors need to examine lease expirations, in-place rents, tenant stability, concessions and rollover exposure. A shallow-bay property may have attractive physical characteristics, but its performance depends heavily on the quality and structure of its leasing.

For developers, the same discipline applies. Land costs, construction costs, local zoning, achievable lease rates and tenant demand need to be evaluated together. Pennsylvania's local regulatory structure adds another layer of complexity: with 67 counties and 2,560 municipalities, zoning and development requirements can vary significantly from one location to the next.

 

A market that supports local economies

The CREDA study brings national attention to a product type that has historically received less institutional focus. Local market stories add an important local dimension. Shallow-bay industrial is not simply smaller big-box space. It is a diverse, locally driven segment whose performance depends on the relationship between real estate, businesses, labor, transportation and community growth.

These properties provide the space where contractors, manufacturers, distributors, service providers and other local businesses operate, grow and serve the markets around them. Their importance is therefore measured not only by rent growth or investment performance, but also by the economic activity they enable in Pennsylvania communities.

Lee & Associates was pleased to contribute Pennsylvania market expertise to the CREDA research effort. The national study provides a valuable framework; Pennsylvania market data shows how that framework can be applied in practice.

 

Data sources and attribution
The national observations in this article are informed by the CREDA Research Foundation study “Developing, Owning and Operating Shallow Bay Industrial Buildings”, in which Lee & Associates participated as a market expert. Pennsylvania market statistics are based on CoStar data and Lee & Associates internal research.