MARIJUANA
An Emerging Industry’s Impact on Industrial Real Estate
Colorado’s emerging marijuana industry has boosted Denver’s industrial market in recent years and offers insight to other markets in the United States that are
considering legalizing either medical or recreational marijuana.
Marijuana’s influence on Denver’s industrial market has
been building for over a decade. The industrial space needed
to cultivate and manufacture the product is increasingly in
demand. The first wave of demand occurred in late 2000 when
Amendment 20 legalized marijuana for medical purposes,
followed by a stronger push in November 2012 when Colorado
voters approved recreational marijuana use. Regulations
were established in May 2013 and became effective January
1, 2014. In August 2013, the federal government issued
guidelines that would protect state-legal marijuana businesses
from prosecution, resulting in the influx of out-of-market
investors into Colorado and a subsequent increase in demand
for appropriately zoned industrial property.
While product demand is difficult to gauge due to the nature
of the industry and lingering off-market volume, tax revenues
provide some insight into consumption and production trends.
According to the State of Colorado Department of Revenue,
monthly tax, fees, and licenses collections have steadily grown
through the first seven months of 2014. July 2014 collections
were 110.5 percent above January 2014 collections and year-to-date collections already top $33.6 million through July.
Looking ahead, the Governor’s office has budgeted for a $134
million revenue contribution from the marijuana industry in the
fiscal year beginning July 2014. About half of the tax revenue
collected from retail and medical marijuana currently occurs
in the city and county of Denver, followed by Boulder, Pueblo,
and Jefferson counties. An estimated 44 percent of retail sales
are made by out-of-state visitors in the Denver market.
Despite legalization, it is expected that a significant volume of
marijuana production and consumption is still occurring on the
black and grey market to avoid taxation. Grey market pricing
is approximately two thirds that of retail, while black market
pricing is considerably lower. Thus, although state and local
governments are increasingly improving regulatory controls
and processes, the industry remains challenging to analyze, as
does its real estate impact.
INDUSTRIAL REAL ESTATE IMPACTS
Denver marijuana growers and manufacturers account for
at least 3. 7 million square feet of occupied industrial space
according to CBRE research — making up about 3 percent
of the existing warehouse footprint. The timing of marijuana’s
legalization provided a boost to an already recovering industrial
market in Denver since the recent recession; however,
the emerging industry clearly contributed to rent growth,
heightened absorption, and declining vacancy. While the
marijuana industry has not directly resulted in new industrial
construction, it has indirectly supported new construction by
strengthening market fundamentals.
Absorption related to marijuana cultivation has been largely
concentrated in underutilized Class B and C industrial assets and
leases are generally secured at above-market rates. Growers’
willingness to buy or lease at above-market rates stems from
competition over a limited supply of warehouses in areas
zoned for cultivation; speed to market tactics that are important
in an emerging industry and profitable margins — all which
result in a willingness to pay two to three times market rates.
Lease rates for grow facilities have tripled that of traditional
users and although initial sales prices were marginally above
market, within months of the federal guidelines, prices more
than doubled. However, of the estimated 3. 7 million square
feet currently occupied by grow operations, it is estimated that
only half is in full production. Recently, investor sentiment
has waned with sales prices leveling and in some cases, even
declining.
KNOW THE REQUIRED BUILDING FEATURES
The typical grow operation requirement relies on heavy
power for high-intensity lighting that replicates the sun and
heavy HVAC requirements to mitigate the heating effects
from such lights. Security is a priority for grow tenants and
may be addressed by view obstruction tactics like dry walling
over windows or signage from previous tenants that does not
advertise the facility’s current inventory and function. Grow
operations also require dehumidifiers, carbon filters, carbon
dioxide, and ozone generators. Leases typically range from
three to five years. The average facility size is 10,000 to 20,000
square feet; however, grow operations in the Denver market
range from 2,000 to 100,000 square feet.
By Paul Kluck, SIOR, RPA