A new joint venture aims to capitalize on a segment of the industrial property market it sees as fragmented, underbuilt and in high demand.
Newport Beach, California-based BKM Capital Partners and Boca Raton, Florida-based Kayne Anderson Real Estate have formed a $1.5 billion joint venture to acquire and reposition small- and mid-bay industrial properties across the country, assets that typically cater to local service providers, contractors and light manufacturers.
The partners are targeting older, infill properties with below-market rents and operational inefficiencies — assets that can be acquired well below replacement cost and repositioned for the tech specs of today’s tenants, according to BKM Capital Partners founder and CEO Brian Malliet.
The venture has already been active. In December it closed on a $550 million recapitalization of a nine-property portfolio and a $250 million purchase of five small-bay properties in Las Vegas and Phoenix totaling 1.2 million square feet.
The venture is growing as tariff uncertainty, shipping bottlenecks and inflationary pressures could cool leasing momentum in trade-heavy metros. Nationally, logistics tenants have given back 30 million more square feet of space than they have leased in the past year, and the vacancy rate climbed in the first quarter to 6.9%, according to CoStar data.
Building scale in the fragmented world of small-bay industrial comes with other challenges. These properties are often still owned by the developers who built them decades ago, making large portfolio plays rare. But that same decentralization creates opportunities for groups like the BKM and Kayne Anderson venture that are willing to assemble holdings over time and partner with owner-operators who have boots-on-the-ground knowledge, according to research from JLL.
BKM Capital is an established player in the light industrial sector, while Kayne Anderson, a longtime investor in medical office and housing, is new to the segment.
Growing demand
Despite broader market headwinds, vacancy rates for buildings under 50,000 square feet have held steady below 4%, near pre-pandemic lows, according to CoStar research. The resilience stems from chronic underdevelopment in this niche and strong demand from small and midsize businesses seeking cost-effective last-mile logistics space.
The newly formed venture isn't the only player chasing deals in the sector. Turnbridge Equities purchased a 205,000-square-foot complex of small-bay industrial buildings in Canoga Park, California, for $28 million in April, and is also planning a buying spree of such spaces because of their lack of entitlement risk, diversified rent roll and lower vacancy rates.
Markets experiencing an acute shortage of small-bay industrial properties include Nashville; Jacksonville; Orlando; Tampa; and Charlotte, according to CoStar data.
Population growth in these metros has spurred demand from housing-adjacent industries, including contractors, HVAC installers and pest control companies, all of which depend on small-footprint space near growing residential neighborhoods.
Despite demand, the operational intensity of managing smaller tenants and fragmented portfolios deters many institutional investors, who often prefer the scale of larger logistics assets, according to Al Rabil, CEO of Kayne Anderson.
“The small-bay industrial market is not a segment where capital alone drives success,” Rabil said in a statement. “It requires a purpose-built platform, hands-on management, and deep local relationships.”