Pubdate: Tue, 11 Mar 2014
Source: Denver Post (CO)
Copyright: 2014 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: Steve Raabe

WAREHOUSE LEASING COSTS HIGH ON WEED

In Denver, a Shortage of Cultivation Space Has Quadrupled Rates.

Legal marijuana is delivering a powerful buzz to the typically 
unglamorous Denver industrial real estate market.

Booming sales of cannabis have pot merchants scrambling to find 
enough vacant warehouses suitable for growing their product.

Not every municipality in Colorado allows marijuana cultivation, and 
in Denver, where it is OK, very little space is available. Denver's 
industrial vacancy rate of 3.1 percent is abnormally low - the lowest 
in decades, according to brokerage firm Colliers International.

Commercial real estate tracker Xceligent Inc. estimates that 
marijuana cultivation and manufacturing facilities in the city occupy 
about 4.5 million square feet - the equivalent of 78 football fields.

"This industry has come on so fast that initially I was uneasy-it 
seemed like a fad," said Brad Calbert, president of the Colliers 
International brokerage in Denver. "But what's making it sustainable 
is supply, demand and capital. Supply is deficient, demand is 
excessive, and capital is abundant."

Rabid demand for warehouses is pitting pot dispensary against pot 
dispensary, while landlords capitalize by charging premium lease rates.

Industrial brokers report instances of warehouse space leasing for as 
much as four times the prices paid before medical marijuana sales 
began to boom in 2009.

The newest wave of impact in the industrial market is occurring as 
recreational pot sales, which began Jan. 1, are robust. State budget 
officials are projecting sales of $613 million over the next year - 
more than 50 percent higher than previous projections. That's on top 
of an estimated $345 million in medical dispensary sales. January 
sales tax figures released Monday suggest that the market may be 
smaller than those projections.

Some recreational stores have been forced to curtail sales because 
strong demand from customers has outpaced supply.

"Nobody is growing enough marijuana," said Jason Thomas of Avalon 
Realty Advisors, a firm that specializes in finding warehouse space 
for cannabis cultivation. "Activity is off the charts, but we're 
still not meeting demand."

Thomas said that almost all owners of dispensaries and recreational 
stores are looking for more grow space, either to serve their own 
customers or to sell wholesale to other undersupplied merchants.

At a nondescript, unsigned warehouse near Interstate 70 in northeast 
Denver, master grower Evan Schick has to tiptoe gingerly among a 
green expanse of 750 marijuana plants. Growing space is so valuable 
that it's a waste to create aisles between the rows of cannabis that 
supply Walking Raven dispensary in Denver.

With each plant producing an average of 2 ounces of smokeable buds, 
the retail value warehouse's inventory at any given time is worth 
about $500,000. And that's in a 3,000-square-foot building - small by 
comparison with other cultivation facilities. Larger warehouses can 
accommodate plants worth millions of dollars.

Numbers of that magnitude explain why pot-shop owners are generally 
reluctant to talk about the location and size of their growing operations.

Yet the facilities are pervasive throughout Denver. Hot spots include 
the I-70 and I-25 corridors, South Santa Fe Drive, Brighton Boulevard 
and the Platte Valley west of downtown.

Capital in the industry often comes in the form of cash. Marijuana's 
illegal status under federal law limits the ability of dispensary 
owners and growhouse landlords to hold bank accounts and use 
conventional commercial loans.

Calbert related an anecdote told to him recently by the owner of a 
Denver warehouse. The owner was negotiating a lease with a cannabis 
cultivation operator and sought assurance that the grower was a good 
credit risk. The grower walked out to the parking lot, opened his 
car's trunk, and showed the landlord a suitcase filled with $1 million in cash.

Brokers say the competition for warehouses by cash-rich growers and 
dispensary owners is problematic for traditional warehouse tenants, 
such as supply and distribution companies. They're faced with a 
choice of paying sharply higher rents or finding facilities in less 
convenient suburban locations.

Industrial space in the city of Denver leases at an average rate of 
$4.74 per square foot, an increase of 21 percent over the past two 
years, according to Colliers International. But examples are 
plentiful of marijuana businesses willingly agreeing to far higher 
rates-$17 per square foot or more - in order to secure space.

"The cost to play here is really tough if you don't have adequate 
capital," said Elliott Klug, co-founder and CEO of the Pink House 
Blooms chain of marijuana shops. "I thought $17 was the going rate 
for class C office space. It looks like they're charging me the same 
rate (for warehouses) that some oil and gas companies are paying for offices.

Walking Raven dispensary co-owner Luke Ramirez is searching for 
additional grow space. The rates he's being quoted make him feel 
fortunate to be paying just $18 per square foot for one of his two 
current warehouses.

But unwavering consumer demand for recreational marijuana make him 
and other owners willing to pay what the industrial market demands.

"We cannot grow as much as we could sell right now," Ramirez said. 
"Nobody can."

He has found a building he's interested in leasing, but won't 
disclose its location.

"I can't say where," he said. "There are a lot of other people out 
there looking, ready to come in and make a higher offer."
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MAP posted-by: Jay Bergstrom