Weed producers in no rush to sign land dealsLease rates could rise, indoor farming could benefit, experts say
Industrial property owners in Pennsylvania expecting to see green — both in cannabis and cash from higher lease rates paid by medical marijuana growers and processors — will likely have to wait another year as state officials finalize regulations and sort out licensing for the new industry.
But that doesn’t mean large entities who grow marijuana in other states are not researching opportunities in the commonwealth, said industrial real estate experts and legal consultants advising people in the pot business.
“The realization is that it’s coming,” said Jake Terkanian, vice president of industrial brokerage services out of CBRE Group Inc.’s Chester County office. “Companies are trying to take strategic positions, but I think everyone is in the exploratory phase right now.”
A spokesman for one of the country’s leading pot growers, Colorado-based LivWell, said as much, expressing interest in Pennsylvania but adding it’s still “too early for us.”
Heavy upfront costs — a $200,000 license fee to grow and process, plus at least $2 million in required capital under state law — is a major factor that has decision makers pumping the brakes on real estate, Terkanian said. Those high costs will “weed out” a lot of smaller players, he said.
“I think it will be well into 2017 until the hard commitments are made,” he said. “This is going to be big business and they are committing big dollars over the long term, so they won’t do a deal unless there is some certainty they will get a license.”
Pennsylvania is expected to exert more control over licenses, compared with some other states. Expect greater geographic dispersal of licenses, both on the production and retail side, state officials said.
Spreading licenses across the state, with a finite number available, should ease potential spikes in lease rates.
The addition of licenses in the future could push rates up, however, said Justin Moriconi, a Philadelphia attorney with Segal McCambridge Singer & Mahoney. “It’s foolish to think it won’t drive rates.”
In Colorado, which is less restrictive, demand from the marijuana trade has been driving up rates for everyone.
“We don’t have a problem with vacancy on the industrial side. There are so many guys coming in that need the space,” said Jeff Hallberg, a principal with Lee & Associates Denver.
A plumbing business might have been paying $6 per-square-foot for industrial space. But a marijuana business retrofitting that same space might pay triple that price, he said. If property owners put in the infrastructure for those growers, they might command $40 per square foot.
The minimum for production facilities is generally more than 20,000 square feet, he said. Growing and processing facilities often push upward of 100,000 square feet, he said. Some larger entities need a couple hundred thousand square feet, other real estate professionals said.
Moriconi is advising pot growers who have started looking at Pennsylvania to consider rent-to-own and other options if they are worried about missing opportunities. He’s been working with CBRE to develop a virtual marketing tool for industrial sites, both existing and under construction, to help companies with their research on Pennsylvania.
Others are suggesting investors wait because older industrial sites that can be bought on the cheap and retrofitted should still be available next year.
But not every existing building will be able to meet the power needs of marijuana production related to lighting and climate control. There also might not be enough capacity to handle water and wastewater needs.
Facilities also will be required to have seed-to-sale tracking of the medical marijuana sold to dispensaries, and feature high levels of security and surveillance, added Robin Zellers, president of Wormleysburg-based NAI CIR. “These facilities will be very clean and highly secure.”
Despite all the safeguards, the cash-heavy marijuana business presents a sticky situation for large investors, who remain concerned about the reputational and legal risks of the marijuana industry. Those investors include publicly traded real estate investment trusts and other institutional investors who control large swaths of real estate, Terkanian said.
Marijuana-related businesses might have better luck dealing with private developers and private equity owners who are less risk-averse and looking for “value-added” opportunities, he said.
Click here to view a map that CBRE Group Inc. developed to help growers and processors identify real estate options in Pennsylvania.
As growers and processors of medical marijuana explore possible sites in Pennsylvania, they might find room in a growing industrial real estate market.
The inventory of industrial real estate in Central Pennsylvania, which includes Cumberland, Dauphin, Franklin, Lancaster, Lebanon and York counties, stands at more than 159 million square feet as of the first quarter 2016, according to market research from CBRE Group Inc. Industrial real estate refers primarily to warehouse and distribution facilities.
There is more than 4 million square feet of industrial space under construction in Cumberland and Lebanon counties.
The vacancy rate for the quarter was 6.3 percent, according to CBRE.
Across the greater Philadelphia region, which includes the Lehigh Valley, northeast Pennsylvania, southeastern Pennsylvania and southern New Jersey, there is more than 459 million square feet of industrial space, according to CBRE.
There is more than 14 million square feet under construction — most of that being built on a speculative basis.
The Lehigh Valley market alone has about 6.2 million square feet of industrial space under construction.
CBRE also cited completed construction of about 8.7 million square feet in the first quarter.
What is a dispensary?
Imagine a busy Starbucks coffee shop, but one that mostly deals in cash.
Then replace the lattes with cannabis and the coffee-sipping customers with medical marijuana cardholders.
This is how Jeff Hallberg, a principal and commercial real estate professional with Lee & Associates Denver, describes medical marijuana dispensaries.
He also compares them to 7-Eleven convenience stores, but with barred windows and round-the-clock security professionals, restricted access and heavy video surveillance. Some real estate professionals say dispensaries are more secure than bank buildings, which also work well as marijuana-related businesses because of their vaults.
It’s an industry where every plant has to be tagged and bar-coded, every gram of final product accounted for in every store. Many dispensaries have a handful of “budtenders” who can explain each strain of marijuana and other products sold to consumers.
The typical dispensary is 800 to 2,500 square feet with good retail exposure. It might be in a strip mall or other high-traffic area.
In Colorado, where the industry is consolidating and larger players are controlling more of the licenses, many of the dispensaries also are run by growers, Hallberg said. “These businesses are as busy as a Starbucks.”
Some dispensaries are doing so much business that they have to buy from other growers, said Hallberg, who primarily works in three Colorado markets, including Denver. “Supply can be an issue sometimes.”
For the record, there are more marijuana dispensaries than Starbucks or McDonald’s locations in some states.
The dispensary next door
The perceptions about medical marijuana — including its perceived impact on employee productivity — could drive some business owners to move their companies if they are near marijuana production facilities, said Blaze Cambruzzi, COO of York-based Rock Commercial Real Estate LLC.
“Whether it will or won’t doesn’t matter. What leads someone to action is perception,” he said.
The unknown of what that type of business might attract also will have many business owners against it, he said.
He said tenants with expiring leases might attempt to impose lease restrictions on neighboring properties during negotiations over lease renewals with landlords. Tenants in the second year of a 10-year lease wouldn’t have the same leverage.
Rules for growers, dispensaries
Medical marijuana growers and processors may grow, store, harvest or process medical marijuana only in an indoor, enclosed, secure facility that includes electronic locking systems, electronic surveillance and other features required by the Department of Health under the new state law.
Retail dispensaries may not operate on the same site as growing and processing facilities, and they must purchase cannabis from one of the commonwealth’s licensed growers/processors.
Dispensaries, which will pay an initial $30,000 permit fee for each location, cannot operate within 1,000 feet of the property line of a public, private or parochial school or a day care center.
State law provides for the issuance of 25 grower/processor licenses and 50 dispensary licenses. Each dispensary licensee may operate in up to three locations.
However, some of the licenses will go to academic research centers, which will be able to grow, process and dispense medical marijuana. Those centers could secure up to eight of the grower/processor licenses and eight of the dispensary licenses. Those centers could open up to six dispensaries.