Marijuana Industry Influences Denver's Real Estate Recovery

New report from CBRE analyzes marijuana legalization’s early impact on industrial and retail markets

​​DENVER (Oct. 19, 2015) – The marijuana industry influenced Denver’s real estate recovery, accounting for 35.8 percent of total net absorption in industrial space between 2009 and 2014, according to a new research report from CBRE Group, Inc. This new growth industry helped boost industrial fundamentals, decreasing vacancy, lifting absorption and raising rental rates. The marijuana industry also had a positive impact on the retail sector.

“When the medical marijuana market took off in 2009 and the recreational market followed in 2012, it created huge initial demand for industrial space in Denver—growers could not get to market fast enough,” said Paul Kluck, first vice president, CBRE Industrial Services. “The marijuana industry certainly jump-started Denver’s industrial sector recovery and provided other industries, like food/beverage and construction, with the time they needed to fully recover, creating the diverse industrial climate we have in our region today.”

The marijuana industry accounts for at least 3.7 million sq. ft. of occupied industrial space in Denver, or approximately 2.6 percent of the existing warehouse footprint. Since marijuana cultivation is limited to industrial-zoned areas, only 3.1 percent of the land, or 3,038 acres, in Denver County is zoned for marijuana cultivation. The large majority (90.9 percent) of marijuana cultivation in Denver is centralized in four submarkets: Airport/Montbello, Central, North Central and Southwest. The highest concentration is found in the Central submarket where one in 11 industrial buildings are used for marijuana cultivation.

Marijuana growers gravitate toward underutilized Class B and C warehouse space, which has helped drive demand, particularly for aging product. In the top four marijuana cultivation submarkets, direct vacancy in Class B and C warehouse space decreased from 7.9 percent in Q1 2010 to 2.0 percent in Q2 2015. During the same time period, average asking lease rates for lower-class warehouse space in key cultivation submarkets spiked 56 percent from $4.06 to $6.34 per sq. ft. triple net. Sale prices for suitable space have risen in a similar fashion. While traditionally used warehouse space sold for around $40-$50 per sq. ft. in 2014, marijuana investors paid upwards of $80 per sq. ft. While the marijuana industry is not fully responsible for the changes in industrial fundamentals, it has contributed.

The marijuana industry has also impacted Denver retail fundamentals as dispensaries absorb space in the market. According to the Colorado Department of Revenue, there are 214 unique marijuana retail addresses in Denver alone—surpassing the number of licensed liquor stores by five percent. Similar to industrial tenants, marijuana retail tenants tend to absorb Class B and C space.

“Medical marijuana dispensaries were a bright spot during the recession because they leased a number of vacant store fronts in less desirable locations,” said Jessica Ostermick, director, research and analysis, CBRE.

As is the case with many young industries, marijuana growers and dispensaries face several challenges to their growth. Financing is one of the largest obstacles, as marijuana businesses are not legally able to secure bank loans and institutional capital is not yet an option. The industry also has significant overhead costs related to heavy power provisions for sizeable HVAC systems and high-intensity lighting. Colorado’s largest electricity provider, Xcel Energy, estimates that one in every 200 watts of energy it sells goes to marijuana growing.

“The marijuana industry looks very different today versus even three years ago,” said Mr. Kluck. “Many of the growers who initially rushed to be the first to market have left the industry. Those still operating are savvy businessmen and businesswomen who are serious about improving their operations on a daily basis.”

“The young industry will evolve in Denver, as will its impact on the industrial and retail sectors, but the boost to market fundaments is expected to be long lasting,” said Ms. Ostermick.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.