Today’s guest post is by Jason Thomas, Founder, CEO and Managing Broker of Avalon Realty Advisors, Inc., a Denver, Colorado based commercial real estate and business consulting company exclusively serving the emerging legal cannabis and marijuana real estate industry.
The 2016 election season bought another crop of nine states joining Colorado, Washington, Oregon, Alaska and Washington DC in approving recreational and medicinal marijuana sales at the retail level. While the growth and occupancy of storefront retail establishments is the most conspicuous sign of a burgeoning industry, the behind-the-scenes marijuana real estate uses of cultivation, manufacture and processing have proven to be the most impactful on the supply of industrial real estate in markets where cannabis has been legalized.
Legalized cannabis generates huge cultural and social impact plus wealth generation, with commercial real estate a key benefactor. The marijuana real estate impact for each market’s industrial property base will vary by state based on product growing climate and existing real property base inventory. Let’s notice the historical trends in Denver, one of the earliest civic adopters of medical and retail marijuana.
In 2012 Colorado voters passed Amendment 64 legalizing recreational use of marijuana. By mid-year 2016, 62 of Colorado’s 271 municipalities and 22 of the state’s counties had created rules and regulations governing recreational marijuana use. With interstate distribution of a controlled substance still prohibited at the Federal level, each state and the associated market forces were compelled to create the environment necessary to manufacture, distribute and regulate product.
At a state level, regulations now provide for licensing of cultivation facilities, product manufacturing facilities, testing facilities, and retail stores. Local governments were put in the position of allowing or prohibiting related facilities at the whim of their voters. Many cities and counties opted to not allow for either retail dispensaries and grow operations, leaving the City and County of Denver controlling the lion’s share of the market. Translating this opportunity for a commercial real estate industry suffering through the 2009 financial crisis reveals a staggering result. Absorption of older Class C industrial properties skyrocketed through the recession of 2010 – 2014 to the tune of 4 million SF. Since 2014, Denver added another 2 million square feet in industrial absorption. In 2016, occupancy numbers for cannabis related grow and distribution activity now totals 8 million SF statewide plus another 1.5 million in greenhouse operations.
“Colorado’s marijuana industry is a mature business having already been through 2-3 business cycles with significant inflection points”, according to Jason Thomas of Avalon Realty Advisors, a leading industry professional services firm. “While each state is building its own machine to adapt to the new industry dynamic, Colorado is the model and leader of regulation for the industry” adds Mr. Thomas*.
Colorado’s dramatic absorption of light industrial real estate from 2010 through 2016 can be directly attributed to State regulatory oversight of “seed to sale”. How will this develop in other states? The depth of development will correlate directly to the regulatory, business and geographic climate in each state. Certain economically troubled cities and towns will look to grow operations as business reality for their functionally obsolete industrial and land base. Adelanto, CA, for example has taken a leap of faith and tied itself to the industry. Dozens of land deals there potentially aggregating over 100 acres of development rights are whispered to have occurred. This could portend California experiencing staggering absorption in outdated industrial inventory and land once the transition from Medical to Retail is regulated.
For the CRE investor, owner and developer valuing and trading properties with cannabis related occupancy is rife with conflicts even as the industry matures. Class C properties that once sold for $ 20.00 or 30.00 dollars per square foot, now have $ 200.00 in new improvements and may be leasing for $ 12.00-$ 16.00 NNN. Valuations must take into consideration rent, improvements, function, tax, legal concerns (federal forfeiture, etc.). Given these considerations, cap rate values based on income generally range from 11% to 13% according to some industry professionals.
The risk to landlords from existing federal statutes may still control investment decisions. Marijuana is still illegal and classified as a Schedule I Controlled Substance. Federal marijuana charges still pose risks including the risks of being charged with maintaining drug-involved premises, racketeering/RICO, money laundering, significant fines, forfeiture of property and/or jail time.
Regardless of inherent risks, I think future investment and development of marijuana industry infrastructure and logistics is here to stay. Market conditions for related commercial real estate activity rest with each state’s independent climates for regulation, licensing, cultivation, processing and growing. For instance: the Bay Area in California has little developable land, so marijuana real estate investment there will be in warehousing. Riverside / San Bernardino has a huge industrial base, but it is significantly institutional, so the majority of warehousing will be through private ownership.
Once the initial tranche of investment takes place, the industry will look to alternative regional areas, like Adelanto in California or Pueblo in Colorado. Any supply-and-demand dynamic creates absorption of a certain class of real estate that will put upward pressure on rents and property valuations as the industry develops and matures. The commercial real estate industry gained enormous experience in Colorado over the past 7 years and will use that insight to evaluate opportunities for each market in the coming wave. Hold on tight.
Jason Thomas is the Founder, CEO and Managing Broker of Avalon Realty Advisors, Inc., a Denver, Colorado based commercial real estate and business consulting company exclusively serving the emerging cannabis industry.
Special thanks to James R. Thompson, Esq. Of Counsel, Miller & Law, P.C., Littleton, CO for his contribution on statutes impacting landlords.
(Photo credit: Wikipedia)
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