Marijuana grows into KC industrial market

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I’m usually not a fan of acronyms, but chances are, you’ve heard of CBD. Ever since the oil was legalized in Missouri in 2014, it seems everyone’s trying to get in on the wave.

A similar trend started last fall, when medical marijuana was approved by state voters. While some logistics still need to be worked out, the ripple effect is making its way across several industries. The real estate market is no exception, as marijuana cultivators look for the right space to “grow” their business.

2020 is going to be an interesting year!

Matching the right industrial building

As the rise of e-commerce continues nationwide, industrial markets are racing to keep up with the demand for large distribution and fulfillment centers. These big players need lots of space, tall ceilings of 30 feet or more, countless docks, huge truck yards. It’s one of the reasons places like the Edgerton intermodal are quickly filling up.

The other end of the spectrum includes those space previously characterized as “functionally obsolete” buildings—smaller, third-generation industrial buildings that typically have only about 14 feet of clear height, narrow column spacing and minimal docks. Traditionally, the best tenants for these spaces have been light manufacturing companies, but sometimes there wasn’t always a good match.

Here’s where marijuana comes in. It turns out these third-gen buildings are pretty much a perfect fit for cultivators and grow facilities. These growers are typically looking for larger spaces – like around 30,000 square feet – but they like the lower clear heights of these buildings. This allows them to better control the grow environment, including light and humidity.

Another reason these buildings work for pot? More and more communities are placing restrictions on grow facilities (like Kansas City just did), setting minimum boundaries from churches or schools. Those boundaries aren’t usually an issue with many of these older industrial buildings, which are often located in the urban core.

The ‘green’ effect

With new life on the horizon for these buildings, we’re also seeing an increase in rent similar to other cities and states that have already gone through this process. Denver, for example, saw rent climb to double and even triple the average warehouse rental rate between 2014 and 2016.

Investors are cashing in as well. While it’s still the wild west in a way, experts are calling this the next “gold rush.” And with good reason: Consider that California’s marijuana industry is forecasted to be worth $5.8 billion by 2021, according to Arcview Market Research. And that demand is driving up sale prices of small-to-medium sized warehouses there: In Sacramento, for example, prices have increased 30-40% each year. According to Mike Zimmerman, a Sacramento-based commercial real estate manager, “The driver is marijuana.”

Look before you lease

Of course, increased reward often comes with increased risk—or at least new challenges. Local boundary laws aside, leasing to grow facilities comes with its own set of hurdles for building owners. Carmen Andrade, an attorney with Porzio Bromberg & Newman PC, advises careful steps moving forward:

“The expansion of the cannabis industry seems inevitable, although the manner in which it expands and the impact on the real estate industry and the economy as a whole is unknown. What is certain is the fluid nature of it all.”

Consider the following potential challenges:

  • Retrofits: To prepare these spaces for cultivation, decide up front who will pay for the work. Marijuana is still illegal under federal law, which means many large banks may not provide financing for these types of projects. A solution could be a local bank or a private investor, but keep this in mind before moving forward.
  • Lease terms: Consider that grow facilities use a lot of electricity – sometimes up to $10,000 per month – so the landlord should ensure they’re protected. Also, it might make sense to spell out exactly what type of marijuana products can be produced, as some require special safety precautions. Andrade recommends that landlords secure a “healthy upfront security deposit as well as the ability to draw down on the deposit if the lease is terminated due to compliance with laws.”
  • Environmental regulations: Check local and state laws for environmental rules around noxious smells and fumes, as well as any guidelines that address energy usage and conservation. Make sure the lease places the burden of compliance on the tenant, as well as the requirement that they stay up-to-date on these laws as they change over time.
  • Insurance: Make sure insurance will cover liability, workers’ comp, rent interruption, etc., without a negative effect on your other policies. It might be wise to ensure your tenant can self-insure.

We’re all watching to see where this industry is going, but if you want to explore the potential opportunities available for your property – or for your next investment prospect – make sure you have an experienced partner at your side. After all, this latest “gold rush” sure does look green to me.

Jeremiah Dean, CCIM, is vice president of leasing at Copaken Brooks, a full-service commercial real estate firm headquartered in Kansas City and serving the Midwest. The company’s full suite of services includes: leasing (office, medical, retail, industrial and underground), construction management, investment acquisition and sales, tenant representation and HQ relocations, condo management, property management, asset management, and development. Share your thoughts on our Facebook page or on Twitter @CopakenBrooks.

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