Will California's Cannabis Real Estate Markets Copy Colorado?

January 8, 2018
Written by: Carol Ann Flint
By Carol Ann Flint

Colorado adopted legal marijuana use for debilitating medical conditions in 2000. Over the next decade,
the law expanded, eventually allowing legal dispensaries in 2009. Colorado’s Amendment 64, passed by
voters in 2012, approved the use and sale of recreational marijuana in the state. Colorado left it up to
counties and municipalities to determine if, where and how to license the growth, manufacture,
warehousing and sales of weed. (As of mid-2016, 228 of 321 jurisdictions, or 71 percent, still banned all
marijuana sales.)

Capital inflows to Colorado real estate investment supporting cannabis-related businesses revved up
when the US Department of Justice announced in 2013 that it would not prosecute the cannabis-related
segment of federal law in states that had legalized pot, granting protection to the industry. Out-of-market
investors, their capital and their employees flocked to Colorado to cash in.

Some counties and cities have determined not to limit the number of licenses for retail or medical sales;
others have predetermined a maximum number of licenses that will be issued. Other jurisdictions have
decided to be grow and warehouse friendly. Those jurisdictions that tolerate cannabis have experienced
massive changes to their industrial real estate markets, which affect the state as a whole.

Colorado initially limited grow operation licenses to those who were linked to a retailer. Retailers who
wished to sell recreational pot when full legalization commenced had to have been medical purveyors
licensed prior to October 1, 2013. This requisite vertical-chain limitation from grower to retailer restrained
the expansion of retailers and curbed an explosion of unlicensed grows.

Even with these limitations, a land grab, particularly for warehouse space, occurred in weed-friendly
Colorado districts. The timing of recreational pot legalization in Colorado happened in tandem with a rise
in overall economic activity after the Great Recession, which resulted in radical absorption rates and a
rise in the rental rates of Colorado warehouses.

In any state that has legalized marijuana, roughly 80 percent of available industrial real estate is not
available for cannabis industry use due to loan constraints and other ramifications of the federal
classification of pot as an illegal substance. The remaining 20 percent of real estate inventory is subject to
jurisdictional restraints and the willingness of owners to risk seizure by federal statute, which affects its
availability to the industry. The inventory left in Colorado, primarily in heavy industrial areas with 40- to 60-
year old buildings, is what became home to 3.7 million square feet of “cannabiz,” or businesses growing,
manufacturing, storing and distributing marijuana.

In Colorado, between 2009 and 2014, 35 percent of all industrial leasing in Denver was related to the
expanded legality of marijuana. Class C industrial warehouse vacancies plummeted from 8 percent to 2
percent in this period. Class C industrial rents jumped 56 percent from their 2009 recession lows to their
2014 levels, following recreational legalization.

What had been functionally obsolete factory and warehouse properties underwent rehabilitation at as
much as $200 per square foot, for installation of upgraded electrical capacity and delivery—mostly to
control the climate for grow operations—and for manufacturing. This capital investment has not only
recapitalized individual properties but revitalized and cleaned up warehouse districts, which are now
thriving and supporting multiple levels of employment.

As the supply meets the demand, retail pricing is declining. Weaker players are being consolidated into
dominant operators, and the demand for space is leveling off, even while the overall economy is vibrant
and demand for all warehouse space is strong. The absorption rate of industrial space by cannabis
businesses is now slowing.

The big profits happen early in the cycle, when expansion is greatest, so investors are setting their sights
on—and deploying their capital in—markets that are now earlier in the cycle of legalization and rapidly
expanding the chain of supply and distribution, like California.

California cities with functionally obsolete warehouse space are poised, if their citizens vote to allow it, to
take advantage of Proposition 64’s wealth-generating potential. In zoned areas, employment will get a
nice boost and land values and rents will rise dramatically. Warehouses will get expensive renovations.

Early in the legalization cycle, landlords will be able to charge inflated rents in exchange for their risk of
federal forfeiture, absence of debt constraint, and location in jurisdictions that allow marijuana. Expensive
upgrades to old warehouses and huge electricity costs will be justified by the high retail price of pot. For
now, the opportunity is too big to ignore: grow as much as you can, to be ready for the day legal weed
can be sold.

Takeaway
Federal, state and intrastate jurisdictional differences will concentrate pot-related wealth creation.
Limitations on legalized pot amplify the opportunity in the concentrated areas. If—or when—restrictions
are eliminated, economic activity will diffuse, and marijuana will become just another crop, like lettuce or
broccoli (or more like tobacco).

The race to build and deliver a legal marijuana business supply chain will create huge winners—and
some losers who are late to the game. Some players will be absorbed, as dominant operators push out
the second-tier competition.

Marijuana will cost less in the future, as the supply meets the demand. If federal law is loosened and
interstate transportation is legalized, growing facilities will be located where land is very cheap and will
not be required in each state, which will lessen the demand for warehouse space.

There is already speculation about the marijuana real estate boom and bust. If a marijuana real estate
investment requires the price of pot to stay the same forever (it probably won’t)—don’t make the deal.
Warehousing inventories of typewriters made sense at one time—and then they didn’t. A new industry will
come along, and the real estate will be retrofitted again. With change comes opportunity.

About the Author
Carol Ann Flint is an investment sales broker at First California Realty in Marin. She relocated to the Bay
Area from New York City in 2015.

This article will also appear in The VIEW, the quarterly publication jointly curated by the three Bay Area
chapters of Commercial Real Estate Women (CREW)—CREW San Francisco, CREW East Bay, and
CREW Silicon Valley. CREW is a nationwide business networking organization dedicated to the
advancement of women in commercial real estate. For chapter news, events, and membership
information, visit the Bay Area member organization websites at crewsf.org, creweastbay.org, and
crewsv.org.