The state of Colorado legalized the recreational use of cannabis in 2012. Cannabis legalization, along with its medicinal and recreational use, also affects the economy of the state. In this article, you will see how cannabis impacts the commercial real estate market of Denver. However, before talking about the CRE market in Denver, let us first see how cannabis affects real estate.
Top CRE developer of Denver, Koelber and Co’s CEO Buz Koelbel said to the Denver Business Journal that “Real estate allows us to become part of the community because we’re creating physical pieces of that community”.
It is difficult to believe that a recreational herb which can be grown in your backyard can have any bigger economic impact other than the “high”. But, cannabis has really impacted the real estate growth in the locations where it has been legalized. A recent study shows that recreational marijuana stores have raised the prices of adjacent houses by as much as US$ 27000. This is close to an 8% increase in real estate prices because of legalized marijuana sales. Researchers are citing multiple reasons for this increase in prices.
One possible explanation is that legalization of marijuana led to an increase in jobs. The state of Colorado alone created 18000 new marijuana related jobs. Most of these jobs consisted of working the warehouses, packaging and sales work at marijuana retail stores. These employees would prefer to live close to their workplaces and thus the demand for housing increased around the marijuana stores.
Another reason for an increase in real estate prices is the simple fact that many home buyers indulge in the recreational use of marijuana and they treat the marijuana store as an important public amenity just like a nearby school will be for a family with kids. Hence they would pay a bumped up price to stay close to a legal marijuana store.
There has been a decrease in the crime rates with the advent of legal marijuana stores because more cannabis is now available in the white market. Plus, it has created new jobs for low-income neighborhoods. As a result of low crime rates, these neighborhoods are now attracting homebuyers which eventually increase the real estate value.
Commercial Real Estate in Denver has shown positive growth in 2018. As per the latest report by CBRE, nearly 10 million square feet of new industrial, office and retail sector buildings are under construction and more developers are showing confidence in the Denver CRE market. Because of the new construction, the lease rates of available properties are increasing. The increased lease prices have not dampened the demand for commercial space in Denver. CBRE Economist and Director of Research, Matt Vance said that more than 1.3 million square feet of new commercial space got absorbed in the Denver commercial real estate, despite the rising industrial real estate prices.
Cannabis is also boosting the commercial real estate space. There have been both direct and indirect impacts of cannabis on the CRE market in Denver.
The direct impact of cannabis on the CRE market is evident from the fact that marijuana-related properties occupy around 4.2 million square feet of commercial space. This is just the grow operations that we are talking about. This number would further increase if we take into account the other supporting operations in the marijuana production i.e. lighting, testing, packaging, etc. The current marijuana-related CRE market accounts for up to 3-4% of the entire CRE market of Denver.
While this percentage may look small, the demographics of this market share indicate that almost 40% of the commercial real estate space in low-income neighborhoods is now occupied by marijuana-related businesses. More and More businesses are seeking rented commercial spaces for warehousing and growing marijuana indoors. Lower-tier industrial properties provide a perfect balance for these businesses as the buildings are below average with low ceiling heights and rents are comparatively lower than the posh industrial areas. So, marijuana businesses can consume more power and reduce their rented space costs. However, this has led to an increase in property values in these neighborhoods along with an increase in property taxes.
Low-tier industrial areas like the three neighborhoods of Globeville, Elyria, and Swansea collectively known as the GES, have seen a tremendous increase in marijuana businesses. As per the Assessment by Denver City Council, the real estate price of GES has increased by 40% from 2015 to 2017 with Swansea showing a rise in median real estate value from US$94,750 in 2015 to US$178,400 with an incredible 88% growth in CRE.
The commercial real estate in the GES neighborhoods of Denver mostly indicate the grow operations or the manufacturing and packaging units of cannabis. However, the CRE market has seen another indirect impact of cannabis which is on the retail side. We are talking about hundreds of marijuana retail stores which have surfaced recently in the various neighborhoods of Denver. Homebuyers are looking at these stores as essential public amenities while deciding to buy a home as discussed earlier.
Nevertheless, this sudden increase in commercial marijuana establishments has led to a spike in the property taxes in Denver. People are paying almost 60% of their income towards housing. The licenses initially issued for marijuana grow operations have already reached a saturation level with a large land area being now used for cultivation of marijuana. Soon this bubble might burst as the taxes start hitting an all-time high.
Denver City Council has recently put a moratorium on issuing new marijuana licenses for cultivation to control over-saturation. As a result, we might see a reduction in real estate prices and property taxes. It may come as a relief to the households living near the marijuana grows zones. However, it is not good news for stakeholders in the CRE market of Denver, especially in the GES zone. Having said that, an increase in property taxes is also not going to aid the CRE market as it will drive away the profitability of marijuana cultivation and hence reduce demand for CRE space. Therefore, there should be a balance between the number of licenses issued for cultivation by the government and the commercial real estate valuation.
Perhaps, an alternative to the large-scale marijuana businesses can be the online stores of marijuana which are basically small households growing cannabis on a smaller physical space, thus reducing the burden of property taxes on the cultivation zones. You can buy weed online and get it delivered to your place saving time and money both. This will allow both large cultivation areas to operate in sync with small business owners and will put a check to the rapidly increasing property taxes. One benefit of shopping for weed online is the ability to select and learn about different varieties of cannabis. For example, you can get more info about blueberry strain if you trying shopping online.
To summarize, Denver CRE market has a great potential for all investors alike because of the legalized cannabis operations. However, authorities should investigate the negative impact of property taxation and curb the saturation of commercial land space by marijuana cultivators.
“Jessica Smith has been writing for a few years now. She is a writer by day and reader by night. Holding on to her passion for fitness, she believes that a healthy diet is a key to healthy living.”