If you're thinking there's plenty of warehouses to go around, you may be right — unless you're planning to set up shop in Los Angeles or Orange counties. Demand for industrial space in these areas nearly outpaces supply, and for cannabis-related tenants, finding a “for rent” sign is just the first hurdle in the bid to walk away with signed leases in hand.
There is more than 1 billion square feet, or more than 92.9 million square meters, of warehouses, distribution centers, and other industrial building types in the Los Angeles area, and most of that space is already occupied. At the close of 2018, the vacancy rate was just 1.6 percent in the City of Los Angeles, the lowest in the country, according to a report by global commercial real estate services firm Colliers International. And in the Greater Los Angeles area, which includes the metropolitan areas across Los Angeles, Orange, Riverside, San Bernardino and Ventura counties, the vacancy rate was a similarly challenging 2.5 percent. Orange County ended the year with a vacancy rate of only 2.8 percent. Thank or blame e-commerce for the tight squeeze; those online orders have to be stored and distributed from somewhere.
The low available inventory in these markets shrinks to an even less palatable size for marijuana tenants, which are restricted to setting up shop in areas zoned for cannabis-related activity, called “green zones.” Distributors, cultivators, and the like can only operate in properties located, for example, outside of a 600-foot, or 183-meter, radius of any school.
KushCo Holdings Inc., provider of ancillary products and services to the marijuana and hemp industries, is no stranger to the struggle. The company's lease on a nearly 3,000-square-foot office and warehouse space in an industrial section of Lawndale, a city 20 miles southwest of downtown Los Angeles, was due to expire in January 2019. Instead of trying to renew, the company decided to make room for the Lawndale team at its new corporate headquarters.
“Part of that decision was knowing the challenges to finding cannabis-friendly real estate in the area, and the hurdles there and the lack of desire to wade into that,” said Matt Canter, Director of Marketing at KushCo Holdings Inc.
The legalization of adult-use marijuana in California in January 2018 opened the floodgates for new entrants to the industry, and an increase in demand for warehouse and manufacturing facilities has followed. However, the answer to whether that demand is being met is unclear. The precise presence of cannabis-related tenants in the Los Angeles industrial real estate market is, well, hard to pin down.
“I honestly have not seen in L.A. County enough cannabis deals happening that I could say it's even a trend,” noted Chuck Littell, Senior Vice President with Colliers International. “The lack of statistics is a bit surprising, but a lot of it's just the fact that the market's so tight, there's not a whole lot of spaces.”
Charles E. Jack IV, Senior Managing Director with commercial real estate valuation and advisory services firm Integra Realty Resources, concurs, noting that specific industrial occupancy levels among cannabis-related businesses in the Golden State can be elusive.
“Right now, I would estimate that on a square feet of Marijuana Industry (MI) space per capita basis, California is nowhere near its West Coast neighbors [that legally permit the recreational use of marijuana] such as Oregon, Washington, Nevada, Colorado.”
The void in official occupancy numbers belies the fact that there is a growing number of cannabis-related businesses in need of industrial space in the super-tight industrial real estate markets of Los Angeles and Orange counties. According to an industry expert speaking on condition of anonymity, the lack of firm statistics has less to do with the comparatively small presence of space-seeking cannabis businesses and more to do with the absence of a central resource for tracking the information.
Details about which locations are cannabis-authorized would have to be cross-referenced with licenses at the state and local levels manually to get an accurate account of the space and who is occupying it. For firms that put together market reports, such a task would be cost-prohibitive without paying clients onboard.
Timing, Pricing, and Stigma
When marijuana-related businesses do find space available for lease in the high-demand industrial markets of Los Angeles and Orange counties, they frequently face other hurdles, and timing is one of them. The process of securing local government approval to open a cannabis operation can be long, perhaps too long to lock down a lease agreement.
CSPA Group Inc. submitted its application for a permanent manufacturing license to the California Department of Public Health's Manufactured Cannabis Safety Branch in May 2018, and the CannaStrips manufacturer received a certificate in January 2019. Fortunately for CSPA, the company is building its own facility in Southern California.
Landlords may be resistant to the idea of waiting for a prospective lessee to obtain requisite approvals when another eager tenant comes to the table ready to sign.
Pricing is another obstacle for cannabis tenants. Strong demand and limited supply have caused rental rates to skyrocket, and those prices grow even higher with the very specific buildout requirements for a cultivation facility, production facility, dispensary, or testing lab.
“Take the sale of an industrial property for $150 per square foot that was approved for a cultivation facility but has not yet been built out for such use,” Jack said. “That tenant or buyer may immediately spend another $100 to $150 per square foot for tenant improvements for plumbing, HVAC [heating, ventilation, and air conditioning], electrical, lighting and other necessary upgrades to accommodate the facility.”
And then there's the issue of stigma, which is often more apparent in the industrial market than the office market, where tenants do not handle products and are, therefore more able to blend in with the traditional occupant. State law gives property owners the right to limit, or prohibit entirely, the cultivation or use of marijuana on their properties. However, change is afoot, according to Littell.
“I just think that landlords are starting to take the cannabis business much more seriously because a lot of the cannabis businesses are much more professional now,” Littell said. Yahoo Finance currently tracks the stock prices and data of 22 cannabis growers, pharmaceutical companies, and related businesses, which certainly adds an air of professionalism to the marijuana industry.
While social acceptance is increasing, the real estate market hasn't quite reached full maturity in that respect. “Talking about today, at the end of the day, the landlord of these commercial properties will lease to whom they desire,” Canter said.