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  • Writer's pictureMAREJ

Values and Rents Get High

The legalization of marijuana for recreational use in the Northeastern United States will be a boon to the economy and will significantly increase tax revenues to the states that allow marijuana usage. Specifically, the legalization of marijuana will be a boon to commercial real estate, as an increase in new demand for real estate will cause vacancies to significantly decline, and rents and values to significantly increase, in specific sectors. Based on our national experiences in states that have previously legalized marijuana for recreational use, we project an inflation bump in the market rents and values to warehouse and industrial space and retail space in those markets that would permit marijuana growing or retailing operations.The economic theory is straight forward. With the swipe of a pen, the legalization of recreational marijuana creates an entirely new industry which will consume real estate. Analogous to the prohibition and re-legalization of alcohol, where a vast, real estate-using, industry was first condemned, then re-instated, the marijuana industry will be a sizeable industry that instantly needs real estate.

Risk Rates

One major difference from the end of alcohol prohibition is that marijuana will not be legalized on the federal level. This creates special risks to the property owner or landlord. Federal prohibitions will complicate the real estate transactions. As federal regulations ban the production and sale of marijuana, many marijuana businesses will be prevented from using banking services or credit card payment networks, meaning much of this business will be in cash. Obtaining insurance will also be complicated. The complications caused by the federal prohibition, and perhaps the culture of this industry, may increase business failure rates and thus borrower and tenant credit loss rates. These conditions are expected to increase risk components in discount and capitalization rates. However, on balance the increased demand and higher rental rates are expected to off-set these risk rates.

Value Trends

The economic data is also straight forward. In states that have previously legalized recreational marijuana, we observe significant decreases in vacancies, significant increases in the market rents and values to warehouse and industrial space and retail space where the legalization is impacting local markets. From our appraisal analysis of those, we forecast the following impacts:The marijuana industry requires two types of commercial real estate; warehouse and industrial space for growing and processing operations, and retail space. We expect the zoning, permits and approvals process to be intensive. With that, the final outcomes will impact real estate as follows.

Warehouse/Industrial Space

If rules in the northeast follow those of other states, marijuana growing and processing operations will outbid conventional tenants and buyers for otherwise general-purpose warehouse and industrial space. In Colorado, for example, marijuana plants must be grown indoors. Since grow ops do not require structurally different space than a typical industrial user needs, but are much more profitable, they can afford to pay higher rental rates or purchase prices for industrial space. Marijuana uses do require upgraded electricity for growing lights, ventilation, heating, and some plumbing modifications may be needed. Of course, security is a notable issue.For example, in New Jersey, where warehouse markets are already strong near New York and Philadelphia, markets will experience accelerated inflation. This will drive less competitive businesses to the northwestern and southern-most counties. If legislators zone the grow ops to the currently less dynamic counties, the state may aid in the economic development in these counties, and may preserve the currently healthy industrial property market status quo while avoiding displacements there. In any case, overall values for warehouses will be going higher.

Retail Space

Our research reveals that there will also be a large impact from legalization to class B and C retail space. Prime retailing outlets, such as major malls owned by institutional grade landlords are less likely to accept marijuana retailing tenants, given the risks associated with the Federal legal standing. Much like certain alcohol retailing establishments, marijuana retailing tenants are likely to be located in standalone buildings away from national retailers, or in secondary properties. The exterior and interior finishes are often average or better, for both customer expectations and the maintenance of regulator good will. Building structure must allow for high security. High traffic counts and visibility may not be needed as these establishments are destinations. Otherwise normal retail space will suffice. The experience in other states indicate those older, previously less desirable retail facilities suddenly have new prospective, monied tenants. But not all locations will benefit as marijuana retailing zoning is typically restrictive. Zoning typically prevents such retailing near schools, playgrounds and the like. Thus the overall positive impacts will be unevenly spread over localized maps. Still, overall values for retail will also be going higher.

Mark Pomykacz, MAI, AI-GRS, ASA is managing member of Federal Appraisal, LLC.

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