SAN DIEGO—With the likelihood of a 2016 California ballot initiative to legalize recreational marijuana along with new City of San Diego zoning laws, Cassidy Turley real estate experts recently took a closer look in evaluating the potential impact such an approval would have on the industrial market. In doing so, the firm looked at cities such as Denver, where marijuana legalization has fueled a boom in demand.

“The legalization of marijuana is a hotly debated topic on many fronts” says Todd Davis, senior vice president with Cassidy Turley's San Diego office. “While it remains to be seen how the movement toward legalization progresses in California, it's interesting to observe the impact being felt in markets such as Denver, where marijuana retail and industrial grow facilities are absorbing available space at an incredible rate.”

San Diego recently adopted a new zoning plan for medical marijuana dispensaries that currently allows no more than four in each council district.  Dispensaries cannot be within 1,000 feet of schools, libraries, churches, parks, child-care facilities, and drug and alcohol rehab facilities. There also must be a 100-foot buffer from residential zones. The zoning plan still awaits approval from the Coastal Commission for shoreline areas. These very defined restrictions drive the scarcity of available space, creating huge value for owners of real estate that meet these guidelines.

“San Diego is proactively planning for how to integrate and manage marijuana facilities into the real estate landscape, considering overall impact on the community—from public education and recreation facilities to residential neighborhoods,” Davis said. “While the focus right now is on medical facilities, the new zoning guidelines should be firmly in place and understood by the time recreational sales are possibly allowed.”

Davis continues that“Escalating demand for warehouses in Denver pits  dispensary against  dispensary, while landlords capitalize by charging premium lease rates.”

Cassidy Turley industrial brokers in Denver report instances of warehouse space leasing for up to four times the asking lease rates once medical marijuana sales began to boom in 2009.

Since Colorado legalized the recreational use of marijuana in January 2014, the state has collected over $3.5 million in taxes and fees from recreational and medical marijuana sales during the first month alone, says Cassidy Turley. Just over $2 million of this amount came directly from recreational marijuana and approximately $1.5 million was attributed to medical sales tax.

While marijuana is still illegal under federal law, 20 states including California, Oregon, Arizona, Nevada, Michigan and the District of Columbia have legalized it for medical use. Colorado and Washington are the only two states allowing recreational use, with many groups speculating that California is likely to become the third if voters approve the 2016 ballot initiative.

“In Denver, the legalization of marijuana for recreational use appears to be a net positive for commercial real estate, not only for industrial space but for retail and office space as well,” Davis says. “Demand for warehouse space for growing and distributing marijuana is surging in that market, as is demand for space to sell it and space to manage it.

“Should marijuana be legalized in California, available space in San Diego and other markets like it will be limited due to land use restrictions and this could cause fierce competition for locations,” he says. 

Davis noted that marijuana cultivation facilities can range in size from 2,000 to 50,000 square feet.  Retail dispensaries are considerably smaller, typically 1,000 to 2,000 square feet.

“Size-wise, warehouse space will see the most pressure in the market,” Davis explains. “With little land available for new development in many San Diego submarkets and vacancy rates already in the single digits, landlords will benefit from a competitive marijuana market.”

Do commercial real estate landlords face unique issues or liability when leasing to tenants in the marijuana industry?  
“There already is a divide between tenants and landlords where medical marijuana is concerned,” Davis notes. “Some landlords are willing to take on marijuana uses and others aren't. Some of the considerations include negatively impacting other tenants in the building or project. With recreational distribution and sales, landlords need to consider many factors including the risk of increased liability or exposure—not to mention being a good neighbor to those who may not want a marijuana facility close to their business.” 

Because marijuana is still illegal under federal law, many banks, insurance companies and other auxiliary companies do not support the industry—even for medical use only, says Cassidy Turley. “The financing of such operations, for now, will be hard money lenders and funds that are specifically set up to deal with these operations.” 

Newly introduced marijuana stocks have skyrocketed, but many close to the industry look at it like the dot-combubble, where many of these companies are not posting any profits.  However, there is a race to invest with the companies that will rise to the top of an emerging industry, the firm says.

“This in turn affects a landlord's ability to secure financing or insurance coverage,” Davis adds. “At the very least, landlords who allow marijuana operations in their propertiesmay face a myriad of different issues, such as increased insurance costs, potential seizures from the federal government, and possible problems claiming normal property tax deductions.”

Looking ahead, how marijuana plays into the San Diego real estate market remains to be seen.  If voters approve recreational marijuana use in California, and if Denver is any predictor, the industrial market will see a tremendous wave of activity and a surge in rental rates to new all-time highs. 
“As long as there is clear legislation for the sector, landlords will adapt as will their third party providers.”