By Charley Babb

The vacancy rate for commercial real estate industrial space in Denver is hovering at just over 4%, which is a historically low point. Rental rates for “C” class properties have increased from nearly $4.00/sf NNN to as much as $18.00/sf NNN. The property values have in many cases more than doubled over the past two years. So, what is wrong with this picture? It depends on whom you are.

If you happen to be the traditional user of this type of space, it is problematic. Gloria Staebler, owner of the natural history publishing company Lithographie, is being forced out of her 3,600 sf space in a dated Denver warehouse. Her building sold last year to a new landlord who gave her an ultimatum. Sign a new lease within thirty days that increases her rental rate for a three-year renewal term to $18.00/sf from the current $8.00/sf or get out when her lease expires. So, who is willing to pay top dollar for this otherwise mundane space and drive poor Gloria to the hinterlands?

Here is a hint. Certain “plant husbandry” tenants have leased more than four million square feet of industrial space since the growing of a certain plant was legalized in Colorado. That’s right. Medical and recreational marijuana plant growers are gobbling up industrial space at an unprecedented clip.

Twenty-three states have laws legalizing pot in some form, but Colorado has become the epicenter for the marijuana industry since legalizing recreational cannabis by voter referendum in late 2012. It became available to the public through licensed dispensaries on January 1, 2014, and it is estimated that last year retail and wholesale sales exceeded $805 million according to the ArcView Group, which provides data on the legal marijuana industry.

Colorado law requires growers to produce their product indoors or in greenhouses, and thus the demand for the industrial space. High energy uses for lighting and elaborate water systems are necessary for optimal growing conditions. Landlords can offer these services and are most often located in areas away from the churches, schools, parks and residential areas as most municipalities require. This was all well and good in the “early days” when vacant and otherwise obsolete buildings were being flipped into cultivation sites, but today non-pot grower users like Gloria Staebler are being priced out of the city. It is a weird form of gentrification.

The amazing part of the story is that all of this is being done without the benefit of a normal lending environment for the owners of such real estate. Federally insured banks, credit unions, life insurance companies and CMBS lenders are completely avoiding placing debt on such properties. Thus far, only private sources such as “hard money” lenders have seen fit to venture into this arena. It is staggering to imagine what may transpire once a normalized capital market develops for the industry. One person’s boon is another person’s bane. All eyes in the legit weed world are on Colorado to see how this burgeoning industry evolves.

And, get a nice whiff of this: other industrial markets are having the same “Renaissance in Valuation.”  States such as Washington, Oregon and Alaska have already seen increases in rents, occupancy and valuation of once functionally obsolete industrial areas where pot is either legal or expects to be legalized soon.  Beauty truly is in the eyes of the beholder or “user” as the case may be.

The author, Charley Babb, is a Senior Director and Principal of MCA’s Denver office.  Charley can be reached at CBabb@metcapital.com or 303-647-9032.