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Up In Smoke - Is a pot Bubble looming in Denver?

4/7/2014

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As the industrial real estate vacancy rate in Denver approaches all time lows, asking prices for most new industrial sale and lease listings are approaching all time highs. While this is a natural trend in real estate cycles, the marijuana industry in Colorado has drastically tempered the recession phase since 2009 and increased the progression through the recovery phase and into the expansion phase into 2014. 

The insatiable absorption of industrial warehouse and manufacturing properties by the marijuana industry in the last 4 years has driven sales prices up 100% and lease rates up over 300% in many cases. With an estimated 2.5 - 4.5 million square feet of industrial space now occupied by the industry, "traditional users" are now either priced out of the market or left with no opportunities to move or expand their operations.

How will this effect Denver and its short and long term economy?

Restricted Job Growth in Denver?
- If a company cannot expand within or enter this market because of the lack of space, countless jobs could be missed out on.
- Denver has historically maintained a cost advantage over Tier 1 markets across the country. How many companies are waiting on the sidelines or are moving on to more cost effective markets in the region?

Are there still Opportunities?
- Almost all new speculative industrial construction has been of modern distribution facilities over 200,000 square feet with minimum divisibility of 35-50,000 square feet. Nobody to date is developing smaller modern facilities for the local and mid-tier industrial users in the I-70 corridor of Denver. Historically these buildings have not been cost effective as older industrial product was always an available lower cost alternative. With many of those older facilities now occupied by the marijuana industry, the time may be perfect for new and smaller development as the expansion phase continues.
- Property owners in Denver County of I-A and I-B zoned industrial properties who anticipate selling in the next few years should consider listing their property in the near future to capitalize on the current demand and favorable market characteristics. 
- Don't get greedy and be selective. By reasonably pricing your asset a seller can attract multiple interested parties and properly vet potential buyers to help ensure a successful closing. Many properties get tied up and fall apart at the closing table as a result of insufficient funding of marijuana growers and dispensaries and the restrictive banking regulations on the industry. 

A Looming Bubble?
- Denver is in many ways rapidly creating a dependence on the marijuana industry. If the current state industry laws and federal stance should change drastically against the marijuana industry, Denver could face a similar market correction to the Oil & Gas bust in the late 80's and the technology bubble in the 90's.
- The trickle down effect of the industry has benefited property owners, contractors, service companies, ATM machines (ha-ha), and has created a ton of jobs in a "growing industry". The risk from the uncertainties of the industry are hard to measure.

The Risks of "Addiction
" to an Industry
- As apartment construction continues to increase to meet the project population increases along the Front Range and tourism hits all time highs, a pot bubble could drastically effect the hospitality, retail and multifamily sectors.
- As the strong market fundamentals of the expansion phase signal the right time for new industrial constriction, market timing and proper product design and location are critical considerations.
- If negative changes in the marijuana industry occur, a flood of stigmatized, highly specialized, and antiquated industrial properties would cripple the Denver industrial market.

Who is safe?
- With little office absorption attributed to the industry so far, the office market should remain relatively resilient to a correction. It's doing just fine on its own! Stay tuned for the Bitzer Real Estate Partners 1Q2014 Office Market Report!
- Counties and Cities in Colorado that did not jump on the MMJ bandwagon should see absorption by traditional companies in need of space and will not experience the CRE inflation risk in Denver county.

How Likely is a bubble to occur?
- While many will argue that the cat is out of the bag and there is no stopping marijuana legalization in many parts of the country, many thing can not be predicted. These include: new Federal and State guidelines; industry consolidation similar to the healthcare industry, continued restrictive banking regulations, or a public change of public opinion.
- The commercial real estate oversupply and recession market cycle phases are always looming and inevitable. It is only a matter of time so let's enjoy the good times while we can!

"Those who fail to learn from history are destined to repeat it." - Churchill

Please contact Brady Welsh at 303.949.6443 if you would like to discuss listing your property and how these market trends affect your asset.



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    Author

    Brady Welsh is a Commercial Real Estate Professional in Denver, CO and the President of Sherpa Commercial Real Estate. In addition to industrial & office brokerage & development, he enjoys tracking the local and national CRE markets and sharing his thoughts and updates on the industry with this Blog. 


    Please feel free to contact him at Brady@creSherpa.com or 303.949.6443.

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