What About Weed? How Cannabis Production Will Affect the Demand on Industrial Real Estate

Article by Sean Sullivan, Associate in Voit’s Ontario office

It’s pretty incredible how the legalization of either recreational or medical use of marijuana in the United States has changed the legal and commercial landscape of the green-producing plant. And when we say green, we mean the economic benefits it has generated for this country. But how does this affect real estate?

Sure, we know that the increase in marijuana production has carried some tax benefits for the country and an increase in demand for resources in the states spearheading the production benefits. That being said, there are some significant implications for the real estate industry.

The Industrial Real Estate Demands for Cannabis Production

With the demands of consumers increasing with changing laws in more than a dozen U.S. states that allow limited or open use of marijuana, there is an increased need, specifically in the industrial space to meet production requirements.

Because cannabis growers have specific needs when it comes to their growing environment, such as climate control, privacy, security and a significant amount of square footage, many warehouses that have been sitting empty for years now have some appeal to those users. Often times, they need an overhaul if they have been out of commission for some time. But because there is a very specific approach to optimize growing conditions either owners are remodeling them with cannabis production in mind or growers are taking on the remodel expenses themselves.

What It Means for Commercial Real Estate Developers

If you are fortunate enough to own industrial space in a state where the production of cannabis for recreational or medical use is legal, you could be sitting on a gold mine. Because of the risks related to changing laws in a fairly unestablished market involved with leasing to marijuana producers, industrial property owners are regularly charging inflated leasing rates to producers happy to accept the price.

With the industry likely to reach $20 billion by 2021, some tenants are paying as much as 50 percent higher rates than what they would if they were renting the space for more widely accepted industries. In some areas of Denver, the average asking lease price for industrial space has increased more than 50 percent since 2015 – a rate almost unheard of in the commercial real estate industry. And in the city responsible for setting the stage for the future of recreational marijuana use, there are as many as five times more pot retail stores than Starbucks coffee shops. How could this plant not change the real estate industry at large?

Potential Risks for Industrial Space Owners

It may seem like getting into the pot space is a no-brainer, but the reward does come with a few risks. First of all, this industry is largely driven by political influence. Laws and policy can change quickly which could mean an upset in an industry that you would be largely dependent on if you outfitted your properties specifically for cannabis production. Because we are at the forefront of the cannabis industry, forecasting remains difficult.

But assuming you’re in a state that has substantial regulations and laws in place to dictate the practice of the cannabis industry, and are working with reputable organizations seeking out space for production – this can be a lucrative industry for industrial real estate owners and landlords. And it’s an innovative way to boost your local economy and re-purpose otherwise dormant commercial spaces.

Sean Sullivan | Senior Associate
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