The rise of the cannabis industry impacts commercial real estate in many ways because it provides working spaces for everything from growing and testing the products to retail operation. Essentially real estate is the entire backbone of the operation, as this young cannabis industry requires space to grow, manufacture and sell its products. With such a symbiotic relationship like that of the hen and egg, the question changes from if cannabis impacts commercial real estate to how and how far it does.
In the remaining sections of this post, I will explain how this upcoming industry is causing positive ripples in commercial real estate. Also, I will discuss this effect with examples from Colorado and California because Colorado pioneered legal recreational cannabis, while California is America’s largest cannabis market. So, remain with me as I explain how the rise of this sector is impacting real estate for the better.
Main Areas of Engagement
Before proceeding, let us examine some of the areas of commercial real estate that legal cannabis is impacting for good:
- Warehouses for growers: First, the rise of the cannabis industry has caused a need for growing space because this “ground-based” sector requires land to exist and operate. Therefore, all other operations are useless if no planting happens on the ground. Consequently, real estate companies come in as managing custodians of warehouses for selling or leasing. Notably, commercial real estate connects tenants and property owners. So, the need for warehouses and growing land creates business and revenues for real estate agents.
- Offices for operators: Another area of impact in this green rush revolution is the need for office space. Earlier this year California legalized cannabis for recreational use. They have since seen an influx of investors relocating to the state in order to optimize the expanding market, which will in turn necessitate more office spaces for the investors who are relocating. Consequently, more business and income will flow into the industry as realtors get new clients seeking to lease office spaces.
- Dispensaries for sellers: This last front of interaction completes the equation, because what is the point of growing the product if you have nowhere to sell it? Vendors require property to set up dispensaries where consumers can buy their products. This need for vending space brings real estate into focus since managing agents connect property owners with tenants.
Key Areas of Impact
So, how is the cannabis boom affecting the activities of real estate agents in the three sectors we have already discussed?
Here are the three major ways in which this boom influences commercial real estate:
- Limited supply: First, the rise of legal cannabis creates a shortage of supply in the states that have legalized the plant. Unlike other industries, cannabis is sandwiched between legalization at the state level and illegality at the federal level. This sad state of affairs at times creates a shortage of supply for property cannabis investors who need to operate. For example, some property owners shy away from renting out their properties because the federal officials could seize and raid them. Inspired by the same hesitation, other property owners hike prices, therefore creating a scarcity of supply despite the availability of properties.
- High demand: Second, cannabis legalization creates a high demand for commercial premises for growers, manufacturers and vendors. This demand arises from the soaring need for property and limited supply as we have discussed above.
- High prices: An increase in demand coupled with limited supply leads to high prices for tenants and buyers seeking operation space for their cannabis businesses.
The Colorado Case
Taking Colorado as our first case, we found that by the end of 2016 cannabis growers in Denver occupied 4.2 million square feet of metro industrial space. This marked a 14 percent increase over the previous 18-month mark of 3.7 million square feet, according to CBRE Research. Out of this space, about two-thirds of it came from warehouses. The average sales price of cannabis-occupied industrial properties rose to 17.6 percent from 2014 to the end of 2016. Moreover, sales prices of the above properties in 2016 achieved a 20 percent average premium over all other industrial properties.
The Californian Case
With California legalizing recreational cannabis earlier this year, its story is similar to that of Colorado when it pioneered recreational cannabis legalization. Since then, we have seen a rising demand for and prices of properties in the state. For example, Aaron Johnson, a leading real estate lawyer in Monterey, said this about this new trend, “Literally, within a period of two weeks I saw the prices go from $50,000 an acre for undeveloped industrial land to about $300,000 an acre.”
In California, Nipton is a leading example where the price boom is taking effect due to the legalization of cannabis. Since the city embraced the use of medical and recreational cannabis, it has seen an increase in the prices of buildings from $35-$45 per sq ft to as high as $474 per sq ft. The cannabis boom has pushed up land prices as more growers seek cultivation space for their plants. People from all occupations and means are trooping there to get a share of the green rush boom including doctors, lawyers, cannabis groups, famous athletes and even actors. Are you willing to try for a slice of the pie?
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