June 20, 2014 MeissnerJacquet

In 1996, California became the first state to legalize marijuana for medicinal purposes, but a bill to make the recreational use of marijuana legal has been on the California books for over 45 years (in some form or fashion) and it has yet to pass. The latest, strongest push for legalization of recreational use of marijuana is poised to happen in 2016.

Colorado and Washington made pot legal for both recreational and medicinal use in 2012. Although both states have been slowed by some road bumps along the way, (mainly Washington), one thing is very clear – commercial real estate in both states has been greatly affected, especially in Colorado.

Why? First of all, the potential money to be made from the cultivation and distribution of marijuana is staggering. According to Jeffrey Miron, an economics professor at Harvard University, “The cannabis industry would generate about $20 billion a year if it was legal nationally.” But before that can happen, growers are in need of a place to cultivate their product. And here’s where the commercial real estate market is set to reap the benefits, warehouses are the ideal space.

This is what is happening with industrial space in Colorado.

Marijuana cultivation isn’t legal in every part of Colorado, but it is in Denver. Thereby available warehouse space is becoming very scarce.  At 3.1%, Denver’s industrial vacancy rate is the lowest it’s been in decades. The estimate’s on the industrial space square feet used for pot cultivation, according to Commercial real estate tracker Xceligent Inc., it’s “ about 4.5 million square feet — the equivalent of 78 football fields.”

“This industry has come on so fast that initially I was uneasy — it seemed like a fad,” said Brad Calbert, president of the Colliers International brokerage in Denver. “But what’s making it sustainable is supply, demand and capital. Supply is deficient, demand is excessive, and capital is abundant.”

The state of Washington has also legalized marijuana sales, but legal retailing hasn’t been approved. “There are numerous reports of pot being sold via Craigslist and other sites, however, with customers ordering it up as if it were pizza”, stated reporter Fred Barbash of The Washington Post.  Following the trend in Denver, warehouse space is already being snatched up in Washington in anticipation of retailing legalization.

But there are two not-so-sunny sides to the boom. After choking on the cost of a premium priced warehouse for pot cultivation, cultivators have had to prepare themselves for another shock. The electricity bills are astounding. Experts say that the energy consumption in the pot cultivation business is extremely high. Also, the lights in these facilities stay on 24/7 as does the climate control.

What does this mean for the commercial real estate market in California? This Spring in California, initial platform support for “the legalization, regulation and taxation of pot in a manner similar to that of tobacco or alcohol” was adopted by a near-unanimous voice vote from democratic state delegates.

It appears that full-fledged legalized marijuana sales are moving closer and closer to a reality in California. The question is, has the California commercial real estate market prepared for the onslaught of industrial space demand?

As Q2 industrial market data indicates, San Diego is in a good position to respond to the forecasted demand for warehouse space, given the rising rental rates and steady completions over the past 3 years. Jerry Jacquet, a Principal at Meissner Jacquét Commercial Real Estate Services, adds that “before any space is occupied, commercial real estate professionals must ensure that all legislative, legal and appropriate business practices are adhered to.”

Sources:

The Denver Post

Bloomberg

Realtor.org

Huffington Post