Posted By LambChop
Of late, the media has been gleefully reporting on the newfound successes of legalized medical marijuana, and its positive impact on the economy in Denver – primarily in commercial real estate. These reported impacts are overstated and fail to take into account that real estate is reflective of the business industry, not the other way around.
Denver (like many American cities) was hit hard by Obama’s Great Recession in 2008. Denver’s major industries have been dominated by specific sectors that were adversely affected by Obama’s policies in response to the floundering economy - energy, aerospace, bioscience, information technology-software, and financial services.
Like many liberal states, the war on fossil fuels seeped into the culture and the local economy - overregulation, exaggerated negative environmental impact of fracking and the touted benefits of green energy sources negatively impacted Colorado’s bottom line. Luckily, the wisdom of capitalism won out and despite best efforts to stop it, today Denver ranks fourth for fossil fuels employment. Colorado is estimated to have finally produced a record 40 million barrels of oil in 2012, driven by new wells mostly in Colorado’s Niobrara formation. But it has taken a few years for the benefits of the energy industry to ramp up.
Typically real estate is the LAST metric to post a positive or negative measure of the health of a local economy. As job growth increases, commercial real estate is positively impacted by lower vacancy rates. But one must consider the long-term viability of the industries who are absorbing the commercial real estate. Job growth in Colorado finally began in earnest at the end of 2012 driven by energy production and biotech. But as a result of the recession, Denver’s vacancy ratios were high from 2008-2012, particularly in downtown locations.
During the slowdown, Denver approved about 650 medical and recreational marijuana dispensaries or retail storefronts. These are supplied by about 1100 growers and kitchens which occupy approximately 1.5 to 3 million square feet of commercially zoned space primarily in Denver's outer industrial zones – warehouse space and land.
Alec Rhodes, managing director at Cassidy Turley Commercial Real Estate Services in Denver said the marijuana industry "got us through the recession. It kept our vacancy rate in check during the downturn," he says, noting that the vacancy rate was 8.6% at its worst and is now "very tight" around 5%.
Interestingly, the Colorado pot legalization legislation promised $40 million of tax revenues to rebuild Colorado schools generated by a 15% excise tax on pot production and sales. In order for that amount to be collected, the cost of production for pot would need to rise from about $600 per pound to almost doubling to $1,100. This will cause a sharp increase in prices of legal marijuana to the end user, and buyers will no doubt quickly and quitely return to the underground black market for lower prices.
Similarly, the enthusiasm of the legalized pot will fade, causing use to naturally decline as the novelty wears off, leaving dispensaries and pot retail stores in a lurch. Government regulations have not moved fast enough and kept up with the development in the industry – growers and dispensaries have no idea how to forecast because they do not know what the regulations will look like nor how much they will cost. Many will go out of business in the first few years, defaulting on leases and large commercial purchases when they realize the legalization of marijuana as a viable business is not necessarily profitable.
While the short-term positive effects of the “honeymoon period” of pot legalization may have impacted commercial real estate absorption rates, it does not bode well for the long-term. There may also be a lasting deleterious effect, why would a bank, engineering firm, restaurant or oil company want to lease commercial space or buy a building next to a pot grower or legal dispensary? Answer: they wouldn’t.