Cannabis Driving Industrial Demand In Denver, But It's Not The Only Driver

The state of the Denver industrial market in one word, according to the speakers at our Denver Industrial Investment & Development Conference: hot. Hot as it's ever been. Cannabis is one reason, but not the only reason.

A number of metrics show just how red-hot the market is, our speakers said. There have been 25 quarters of positive absorption in a row, vacancies below 5% since 2012, and every submarket is seeing record rental rates. Marijuana's been a piece of the story, but there's a diverse set of drivers, including population growth—after all, about 5,000 people a month are moving to metro Denver—and expanding ecommerce.

On the capital markets side, the demand for industrial is enormous. That's true nationwide, but especially Denver. There will be some sublease space coming on the market in the coming years, but not enough to disrupt the market.

Snapped: Confluent Development CEO Marshall Burton, Comunale Properties president John Comunale and CBRE VP Jeremy Ballenger.

CBRE research analyst Katie Murtaugh noted a number of positive effects of marijuana legalization in Colorado, including higher tax revenues and lower retail vacancy rates, but her research focused on the impact on the industrial markets.

Overall, the cannabis industry accounts for about 2.6% of industrial space in the market, but its boom came at the end of the recession and gave a needed boost to industrial landlords, she said. One important effect was that growers took Class-B and C properties that might not have otherwise been leased. Lease rates responded to that demand, with B and C space seeing particularly strong increases.

Our speakers told of the difficultiesinvolved in finding industrial space for the cannabis industry, especially in the early days when it was hard to find space, period. Often growers and retailers would have to take space absolutely no one else would take. The recession helped, as landlords were eager to find users of space, especially less desirable space.

Finding willing landlords, including both industrial and retail, can still be a problem, since cannabis cultivation and distribution is still in violation of federal law. But as the industry grows and landlords learn to structure leases to protect themselves better, that's less of an issue. Also, the more efficient growers are investing in their own space, though that's driven property prices up.

Here are PNI Management & Dunton Commercial SVP Paul Isenbergh, Sweet Grass Kitchen CEO Julie Berliner and Medicine Man CEO Andy Williams.

The challenges ahead for cannabis are less legal than economic, as they are in most rapidly growing industries, our speakers said. The economics of the business is changing, with wholesale and retail prices compressing.

The upshot is that there will be a lot of failures, especially among smaller, less efficient producers. That will put some space back on the market, including older, less desirable space. Trouble is, no one knows who's going to succeed in the long run.

Here are Headgate Cos managing and founding member Chris Shopneck, who moderated, Dixie Brands CMO Joe Hodas and Inspiro president Christian Hageseth.