Commercial Real Estate Sectors Explained for Investors, Part 2: Small-Bay Industrial Investing and Self-Storage | AAA Storage

This article is for accredited investors and allocators evaluating where small-bay industrial investing and self-storage fit in a commercial real estate portfolio. For a side-by-side view of all seven sectors, see our CRE Sector Comparison Guide, available on the Insights page. It's Part 2 of our Commercial Real Estate Sectors Explained for Investors series, covering cap rates, demand drivers, liquidity, and risk for both sectors. Part 1, “Commercial Real Estate Sectors Explained for Investors,” covering multifamily, office, retail, and hospitality.

Since 1993, AAA Storage has developed and exited 90 self-storage and small-bay industrial projects. That track record is the lens for this breakdown.

What Are Small-Bay Industrial and Self-Storage Cap Rates Right Now?

Small-bay industrial properties currently trade between 5.5% and 6.75%, roughly 100 basis points above large-scale logistics industrial (4.5% to 6%). That spread reflects tenant credit profile: big-box logistics tenants tend to carry institutional-grade national credit, while small-bay tenants are typically local and regional businesses, which carries slightly more perceived risk.

Self-storage cap rates range from 5% to 7% depending on facility class. Class A, institutional-grade facilities can trade below 5.5%. AAA Storage recently sold a property under contract at a 5.3% cap rate, reflecting continued compression from the 6% to 6.25% range seen a year ago.

Small-Bay Industrial Investing: Supply, Demand, and Risk

National occupancy in small-bay industrial averages around 97%, with some markets running above 99%. Supply is the reason: 80% of existing small-bay inventory was built before 2000, and almost nothing has been added since 2010.

A major driver of that scarcity is developer preference. Traditional industrial developers have gravitated toward large, single-tenant projects like data centers, which are more efficient to build than subdividing a 100,000-square-foot site into smaller multi-tenant buildings. That's left small-bay underserved even as institutional investors begin to take notice.

Tenant demand comes from e-commerce and last-mile logistics, along with local service businesses: HVAC, plumbing, and pest control contractors, and landscaping companies. AAA has also seen less conventional tenants take small-bay space, including pickleball facilities and batting cages.

Liquidity in small-bay is still developing. Institutional interest is growing, but today the segment trades somewhat less liquidly than large-format industrial, which typically sees five-to-ten-year hold periods.

The primary risk today is the opposite of what large logistics faces: if institutional attention keeps growing, small-bay could eventually see overbuilding as more developers enter the space. Functional obsolescence, where older buildings can't support modern automation, is a real risk in large-format logistics facilities, but it hasn't been identified as a comparable risk in small-bay to date.

Self-Storage: Demand Drivers, Risk, and Performance

Self-storage demand is driven by population mobility, life transitions like moving and downsizing, and small business formation. Housing trends are adding to that: newer homes are being built with less closet and attic space, pushing more storage needs off-site.

Usage has grown from about 11% of the U.S. population to just over 13%, even as the average length of a self-storage rental has gotten longer. That combination points to demand that's both broadening and deepening.

Self-storage leases are month-to-month, which creates more rate volatility than a multi-year industrial lease. The main competitive risk is large REIT-owned facilities within a three-to-five-mile trade area, which sometimes advertise deep introductory rates and then raise them sharply, in some cases six to eight rent increases within a tenant's first 12 to 14 months. That pattern is starting to generate consumer pushback, which favors operators with more stable, transparent pricing.

Where These Sectors Rank Against the Rest of Commercial Real Estate

AAA Storage scored seven CRE sectors across five factors: recession defense, income stability, operational complexity, institutional capital interest, and inflation hedge. Self-storage tied with medical office for the top composite score, 14 out of a possible 16 points. Industrial as a broader category placed second at 13 points.

Separately, small-bay industrial stands out on its own merits. As Paul Bennett put it, it's “one of, if not the most attractive sectors in all of commercial real estate,” largely because of the supply-demand imbalance described above.

Self-storage also stands out on liquidity: exits are possible in as little as three years, shorter than any other sector Paul's team analyzed. And closing out the episode, Paul Bennett ties the two sectors together directly: self-storage and small-bay industrial tie as the best short-to-medium hold development strategy in growth markets today, which is exactly the strategy behind Growth Fund 2.

How AAA Storage Approaches Both Sectors

Understanding why small-bay industrial and self-storage are strong sectors is only half the picture. How a sponsor executes within them is what determines the outcome.

AAA Storage has developed and exited 90 self-storage and small-bay industrial properties since 1993, delivering an average historical IRR of approximately 20% across full-cycle projects. That track record comes from handling land acquisition, entitlement, development, construction, and property management entirely in-house, rather than outsourcing pieces of the process to third parties with different incentives.

AAA Storage is also the largest investor in every fund it sponsors, including Growth Fund 2. When the sponsor's own capital is on the line alongside investor capital, the incentive to protect performance runs in the same direction for everyone in the deal.

That combination, vertically integrated execution paired with direct sponsor co-investment, is what turns sector-level fundamentals like the ones above into an investable strategy rather than just a market observation.

Key Terms

Cap rate: The ratio of a property's net operating income to its purchase price, used to estimate return and risk. Lower cap rates generally reflect lower perceived risk and more stable income.

Occupancy: The percentage of a property's available space currently leased. High, stable occupancy signals strong demand relative to supply.

Functional obsolescence: When a building's physical design can no longer support current operational needs, such as an older warehouse unable to accommodate automated logistics technology.

Transaction lifecycle (hold period): The typical span of time between a property's acquisition and its sale, which affects how quickly investor capital can be returned.

Frequently Asked Questions

Why do small-bay industrial cap rates run higher than large logistics industrial?

Primarily tenant credit profile. Large logistics buildings tend to have national, institutional-grade tenants on long leases, which lowers perceived risk. Small-bay tenants are usually local or regional businesses, which carries a modestly higher risk premium.

Is small-bay industrial a supply-constrained market?

Yes. Roughly 80% of existing small-bay inventory was built before 2000, with very little new construction since 2010, largely because developers have favored larger single-tenant projects like data centers over subdivided small-bay parks.

How does self-storage liquidity compare to other CRE sectors?

Self-storage supports some of the shortest hold periods in commercial real estate, with exits possible in as little as three years, driven by a decade of growing institutional interest.

What is the biggest risk to self-storage returns?

Localized competition from large REIT-owned facilities, which sometimes use aggressive introductory pricing followed by steep rent increases. This has started to generate consumer pushback in some markets.

Why does AAA Storage invest in both small-bay industrial and self-storage?

Both sectors combine strong fundamentals with some of the shortest hold periods in commercial real estate, which is the strategy behind Growth Fund 2.

See This Strategy in Action

Small-bay industrial and self-storage are the two sectors Growth Fund 2 is built around. Contact Us / Schedule a call to talk with our team about how these fundamentals translate into the fund's strategy.