Surging Industrial Demand Makes It Even Harder For Cannabis Cultivators To Grow

The city of Los Angeles’ Department of Cannabis Regulation keeps a list of cannabis cultivators that have applied for relocation — essentially, telling the city that they want to find a new building and change the address associated with their license. 

Joshua Joseph, senior associate, corporate real estate at James Capital Advisors, has a copy of the relocation list, received in September 2020. The list shows 53 cultivators who applied to relocate. 

The reason these businesses are looking to move to a new space is that their existing property is either too small or not suitable for utilizing their licenses to their full capacity, Joseph said, “and the reason they’re on that list is because they can't find [a new] one.”

The demand for industrial space, supercharged by the coronavirus pandemic, is affecting all users of all sizes, including cannabis cultivators. Even though there aren’t new licenses being given out, among the fixed number of cultivators allowed to operate in Los Angeles, many are finding that suitable spaces are being snapped up quickly.

Operators that can’t find space find themselves stuck in a building that is too small or otherwise insufficient, hampering the growth of their business and their ability to meet existing demand for cannabis, which, along with the demand for industrial space, increased with the pandemic. 

“Americans purchased $18.3B in cannabis products over the past calendar year, $7.6B more than the $10.7B in sales the previous year,” a report from the cannabis publication Leafly found.

Though some of that increase was due to new consumers in states where marijuana became legal, Leafly’s analysis of state tax and revenue data found “the main driver was an increase in the average purchase size of established consumers, who increased their average monthly spends by 33%.” 

Ball Family Farms CEO Chris Ball said the pandemic fueled an expansion of his cultivation space in Los Angeles. The company started off with 20K SF in 2018, but during the pandemic, "our product was flying off the shelves, and we almost couldn't keep up with the demand because of the 20K SF we had,” Ball said. 

Ball Family Farms rents its space within a 100K SF warehouse where the other tenant is its landlord. The landlord agreed to let Ball take over an additional 20K SF, which the cultivator moved into in January. Ball said prior to 2020, he thought it would be three or four years before his company needed to expand so significantly. 

Most cannabis cultivators don’t have it so easy. James Capital Advisors’ Korena Ellis said she has five or six LA clients who are looking for a new, larger building, and "it's nearly impossible," either due to a lack of available appropriate space or the landlord not being keen on having cannabis tenants. 

"There are licenses that aren’t being used because they just can't find a spot for them,” Ellis said, and there are companies that can’t expand in proportion to demand for their product.

Cannabis businesses in general have a number of factors working against them in the hunt for space, chiefly that at a federal level, cannabis is still illegal. This makes everything from access to financing to finding a space to lease difficult from the outset. Building owners who have a mortgage likely have a clause included about complying with state and federal laws on the property. City restrictions can also reduce the pool of suitable buildings further, requiring buildings to meet additional criteria such as being a certain distance from schools and churches. 

With more demand for industrial space overall, experts say that tight inventory affects the ability of cannabis cultivators to find space. 

Wendy Berger, CEO at Chicago-based WBS Equities and a board member at Green Thumb Industries, said that low industrial vacancy nationally serves to exacerbate the "real and very challenging problem" of finding real estate as a cannabis cultivator.

"It's going to materially slow down the process" that leads to getting the business up and running, Berger said. "It's a limiting factor of how fast people can move and, in the cannabis business, speed is critical. In a business where you are racing against your competitors to meet demand, every minute matters."

In states where cannabis legalization is new, finding space is an even more uncertain prospect. New Jersey is riding an industrial real estate swell, driven by the need for distribution facilities, with 8.8M SF leased during the first quarter of 2021, a 50% increase from the previous quarter and 34% higher than the five-year average.

But many New Jersey operators are in a holding pattern as they wait for new state regulations to be released in August because of rules allowing localities to opt in or out of allowing cannabis businesses in their areas before the regulations are released, said Robert DiPisa, co-chair of the cannabis law group at the law firm Cole Schotz P.C. While it is possible for these municipalities to change their minds and opt in after the regulations come out, there is little clarity for cultivators over where they will be allowed to set up shop, DiPisa said. 

"These types of industrial and warehouse properties are in high demand in this area, and on top of that, you have this other issue with local municipalities opting out of the industry. Both of these factors are shrinking your options when it comes to potential locations," DiPisa said.

Brokers say that the rising demand for industrial real estate comes from a variety of users, not just e-commerce. 

"You're competing against everybody, but with a very limited pool of available buildings because of the federal illegality and the lack of landlords and/or lenders who will accept cannabis tenants," Berger said.

Zacuto Group Executive Vice President Andrew Sinasohn had a non-cannabis client who needed a 65K SF warehouse anywhere between Long Beach and Downtown Los Angeles. Of the first 13 listings available, all were under contract within days of being released. 

Sinasohn said normally, the hardest part of his business is building relationships with clients — the properties are typically there. But now, he can have a client lined up and a property in mind, “but if you’re not on it within a couple of days and your client doesn’t have strong credit, good luck.”

Cultivators and real estate professionals who work with them sometimes end up competing with each other for space. They have similar space needs and operational needs, like a building that has been or can be upgraded to support the high levels of power required for the growing process.

ILLA Canna co-founder Paul Burgis went up against other cultivators unsuccessfully in the early days of the company, but it happened again when he found a suitable cultivation site a few months ago in the San Fernando Valley neighborhood of Chatsworth. This time, the tables turned. 

"It was probably too small for us, but we made the purchase. It was a very competitive bidding process," Burgis said. 

Ultimately, Burgis found out who he was bidding against on that building and sold it back to one of the losing bidders. 

"I know if it works for me as a cultivator, it's going to work for somebody else also trying to establish a business in the same area,” he said.