Cannabis Startups Set to Boost Warehouse Rents in L.A., Boston

(Bloomberg) -- Industrial rents in already-pricey cities like Los Angeles and Boston are poised to rise further thanks to one burgeoning industry: cannabis.

Marijuana startups are snapping up space in those cities as part of a wave of legalization that was set in motion by ballot-box victories last November, when eight states voted to permit cannabis in some form. California and Massachusetts will begin allowing residents to purchase recreational pot -- not just medicinal marijuana -- making the states especially attractive to entrepreneurs.

Legal weed already has a track record of driving up rents. The going rate for industrial real estate in Denver, Seattle, and Portland, Oregon -- places that previously relaxed cannabis laws -- have grown faster than in cities where the substance is still banned, according to new research from CoStar Group Inc. The firm, which tracks data on commercial properties, expects the trend to continue in cities in California, Maine, Massachusetts and Nevada, all of which are now legalizing recreational marijuana.

Denver rents rose 33 percent from the first quarter of 2014 through May 2017. Industrial rents in Seattle and Portland each rose 27 percent in the same period. That compares with 19 percent gains in the other 54 largest U.S. markets.

Cannabis is the first industry in a long time to have such a clear impact, said Rene Circ, CoStar's director of industrial research. In some urban areas, it's been more pronounced than the effect of e-commerce, he said.

“It's had a tremendous, positive impact on rents and property values for the markets where this has been legalized,” he said. “Taking the experiences from the markets that have been at this for a few years, the suggestion is this will have a positive impact in these new markets.”

Vacancy rates have declined in legal weed cities too, according to CoStar, particularly for smaller industrial buildings. So-called ganjapreneurs have different needs than typical tenants. They often bypass the nicest and largest spaces and pick smaller buildings that have traditionally been less desirable.

Part of the reason? The fire risks inherent to cultivating marijuana. That leads startups to choose smaller spots that are easier to safeguard, Circ said.

“This could have a positive impact for rent growth for that smaller, industrial product in new markets,” he said. Buildings that would have otherwise remained vacant longer, were -- in many cases -- occupied first.

Including the four states that voted to allow recreational cannabis in November, one in five American adults lives in an area where it's legal to get high. Recreational weed commerce is expected to come online in those states in the next six months. 

Land Grab

Cannabis industry sales reached more than $6 billion in 2016 and are expected to hit $50 billion by 2026, according to Cowen & Co. That growth will require a lot of land. But because the plant is still illegal at the federal level, it can't cross state lines. That means pot sold in any state must be grown there too. In many cases, people applying for licenses to cultivate cannabis must show they already have the space to do so locked down.

The industry's inherent risk also is helping push rents higher. Cannabis businesses aren't welcome everywhere -- many landlords won't lease to companies that are federally banned -- so the ones that do can ask for more money.

“We have factors that limit supply, with a lot of demand,” Circ said. “So the rent growth is being pushed from both ends of the spectrum.”

To contact the reporter on this story: Jennifer Kaplan in New York at jkaplan84@bloomberg.net.

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net.