Why Small Industrial Spaces Cost More Per Square Foot Than Large Ones?

I often hear tenants balk at the pricing of smaller industrial spaces. The most common argument goes something like this:

“This 5,000 square feet (sq. ft.) space is $10 per sq. ft.?! That’s ridiculous. A 100,000 sq. ft. space just a town over is only $5 per sq. ft. Why would I pay double for something smaller?”

It’s a fair question, but it overlooks a fundamental truth in industrial real estate: Size matters. And it matters a lot.

Industrial real estate is not priced like a bulk discount at Costco. Just because a larger warehouse space is available at a lower price per square foot (sq. ft.) does not mean a smaller space should be priced the same way. In fact, the price per square foot for smaller spaces is almost always higher than that of larger facilities. Here’s why.

1. Fixed Costs Are Spread Differently

Every industrial space—big or small—has fixed costs, such as property taxes, maintenance, and insurance. A 100,000 sq. ft. warehouse spreads those costs across a larger area, making them less noticeable on a per-square-foot (sq. ft.) basis.

A 5,000 sq. ft. space, however, has similar expenses but far fewer square feet to absorb them. The result? The landlord must charge more per sq. ft. to cover the same overhead costs.

Consider two industrial properties:

• Large Warehouse: 100,000 sq. ft. facility with $500,000 in annual operating expenses. That means the expenses amount to $5 per sq. ft.
• Small Industrial Space: 5,000 sq. ft. facility with $100,000 in annual operating expenses. That means the expenses amount to $20 per sq. ft.

Even though the smaller building costs less overall, its cost per square foot is significantly higher because there are fewer tenants or rental income sources to offset expenses.

2. Demand for Small Spaces Is Higher

Another key reason why smaller spaces command a premium is demand. Large industrial buildings are typically leased by major corporations, logistics companies, or manufacturers with very specific requirements. These tenants seek massive, specialized facilities, and the pool of businesses that need 100,000+ sq. ft. spaces is relatively small.

Small industrial spaces, on the other hand, appeal to a much wider audience, including:

• Contractors
• E-commerce startups
• Small distributors
• Local trade businesses
• Auto repair shops
• Storage and fulfillment operations

These businesses don’t need huge warehouses, but they do need affordable, flexible spaces in convenient locations. Because there are far more tenants looking for small spaces than there are small spaces available, landlords can charge a premium.

3. Flexibility Comes at a Price

Larger industrial spaces are often built with a single tenant in mind—fulfillment centers, distribution hubs, or manufacturing plants. They are typically leased under long-term agreements with little turnover.

Small industrial spaces, however, need to be adaptable. A landlord must design them to serve a wide range of tenants, from a small manufacturer to a repair shop to a packaging business. These flexible spaces often require:

• Multiple utility setups (electrical, plumbing, ventilation)
• Customized lease agreements for various types of businesses
• Frequent tenant turnover management

Because of this, landlords of small industrial properties must account for higher turnover, increased maintenance costs, and more frequent lease negotiations—all of which contribute to higher rental rates per square foot.

4. Operating Costs Are Higher for Small Spaces

Managing a large warehouse occupied by a single tenant is far easier than managing 20 different tenants in a multi-unit industrial property.

For a large facility:

• A single tenant handles maintenance and utilities.
• Lease agreements are long-term, reducing turnover costs.
• There’s one point of contact for property management.

For a smaller, multi-tenant property:

• Landlords must coordinate with multiple tenants for repairs, billing, and maintenance.
• Vacancies occur more frequently, leading to more lease negotiations and marketing efforts.
• Common areas (hallways, parking lots, restrooms) require regular upkeep.

Because small spaces require more management effort and resources, landlords must account for these costs, which leads to higher rents per square foot.

5. Small Spaces Are Rare

Industrial developers prefer to build large facilities because they are easier to lease and finance. Finding newly built small industrial spaces is incredibly difficult because:

• Land economics favor larger developments. It’s more profitable for developers to build one 200,000 sq. ft. warehouse than ten 20,000 sq. ft. spaces.
• Institutional investors focus on large assets. Big real estate firms and REITs prefer large properties with corporate tenants.
• Zoning restrictions limit new small industrial projects. Many cities prioritize larger developments, pushing smaller industrial users to existing spaces.

This scarcity of available small industrial properties further drives up rental prices, as businesses must compete for the limited supply.

6. Large Spaces Have Lower Rents Because of Bulk Leasing

A 100,000 sq. ft. industrial property may be leased to one tenant at $5 per sq. ft. That’s $500,000 per year in rent.

Meanwhile, a landlord leasing a 5,000 sq. ft. space at $10 per sq. ft. only earns $50,000 per year on that unit.

Large spaces benefit from:

• Lower leasing costs (one lease vs. many small ones).
• Bulk pricing on maintenance and utilities.
• Long-term corporate tenants who reduce vacancy risks.

The economies of scale work in favor of larger industrial properties, meaning the price per sq. ft. is lower.

The Bottom Line

When it comes to industrial real estate, price per square foot (sq. ft.) is not just about raw space—it’s about economies of scale, demand, and availability.

Small spaces come at a premium because they:
✅ Absorb fixed costs across fewer square feet.
✅ Are in higher demand from small businesses.
✅ Require more management and turnover costs.
✅ Are difficult to find, making them scarce.
✅ Offer flexible leasing, which carries additional costs.

So, while a 100,000 sq. ft. warehouse might go for $5 per sq. ft., that doesn’t mean your 5,000 sq. ft. unit should cost the same.

If you’re searching for industrial space and trying to make sense of pricing, let’s talk. Understanding the “why” behind the numbers can help you make a smarter decision for your business.