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California’s Cannabis Industry Drives Industrial Demand

California’s burgeoning cannabis industry is fueling a surge in demand for industrial property. Since the passage of Proposition 64 two years ago, allowing recreational use of pot, industrial facilities across the state have been leased by tenants willing to pay a premium.

That’s not unlike the situation that developed in other states like Colorado, where demand soared for even Class B industrial properties once marijuana was legal, first for debilitating medical conditions in 2000, and then legal dispensaries in 2009. The race to deliver space to meet demand in Colorado’s marijuana-friendly districts created a land rush, especially for warehouse space.

Roughly 80% of a market’s available industrial space can’t be used for cannabis occupiers due to loan constrains or federal laws, leaving 20% of space for possible occupancy. The resulting radical absorption drove Class C rates up as much as 56% and vacancy to 2% in Colorado. As much as 35% of all industrial leasing activity in Denver between 2009 and 2014 was related to the expanding marijuana industry.

CBRE reported that marijuana-occupied properties in Denver sold for an average premium of 20% in 2016 and a 25% premium over lower quality — Class B and C — warehouses in the same year.

In the Golden State, the mainstreaming of the marijuana business has brought out a wealth of underground growers, new entrepreneurs and hopefuls seeking to cash in on the newly-minted industry. The retail side of the business has brought a different set of retail tenants into the CRE mix, ranging from upscale shops seeking space in prime storefronts, to cannabis clubs and bars.

But, perhaps the biggest impact across the CRE industry is being felt across the industrial sector. Occupiers need a wide range of facilities from warehouses to grow the product, production space that more resembles a food processing operation or warehouses to store product.

SoCal’s high demand for e-commerce space, distribution or fulfillment centers has driven vacancy rates to historic lows already. That condition is driving prices for industrial space to new heights. For example, in Lynwood, CA, industrial buildings now sell for more than $300-per-square-foot. That is up from roughly $120-per-square-foot in 2016, and prices are expected to “skyrocket” as the market matures and investors bank land.

JLL reported last month that prices of small-to-medium-sized warehouses in the Sacramento region increased between 30% to 40%” year over year, largely driven by the marijuana sector. The national growth implications are clear, given that so far 29 states and Washington, D.C., have legalized marijuana for medical use, and eight states have also approved it for recreational use.

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.