With recreational marijuana use on the verge of becoming legal in Maine, real estate brokers are seeing a jump in demand for industrial spaces that could become indoor marijuana farms in the not-too-distant future.
Marijuana is scheduled to become legal to use and possess Jan. 30, but the scramble for suitable warehouse space for commercial growing has begun, helping to push lease rates to nearly twice what they were six years ago in Greater Portland.
But uncertainty about the regulatory process, which is just beginning in Augusta, efforts by a growing number of communities to set up local zoning rules, and unanswered questions about how the Trump administration will respond to marijuana legalization efforts at the state level may discourage some Maine landlords and tenants from rushing into new spaces, real estate experts say.
But it may not be long before that changes.
In Western states with legal marijuana, cannabis entrepreneurs competing for limited industrial space are now paying as much as three times the average rent to produce marijuana for what has become the fastest-growing industry in the country.
Even with uncertainty about the regulatory landscape for recreational marijuana in Maine, the growth of the states medical marijuana program in the past few years and the anticipation of a recreational market have already helped push the industrial market to historically low vacancy rates, according to local real estate brokers.
The economic opportunities for landlords are significant, said attorney Ted Kelleher of Drummond Woodsum. Even though the process for the state granting licenses is a year away, people are already trying to secure properties.
Maine voted in November to legalize recreational marijuana, joining a rapidly expanding industry with sales that topped $5.8 billion in 2016. Personal possession and cultivation of marijuana is expected to become legal Jan. 30, but commercial cultivation and sales wont begin until 2018 at the earliest.
SPACE AND CONSTRAINTS
Even before the Nov. 8 vote on recreational marijuana, the growth of the medical marijuana program in Maine was helping drive the industrial market in Greater Portland to historically low vacancy rates as caregivers moved their businesses into commercial spaces. That market is expected to become even tighter as the cannabis industry grows, said Justin Lamontagne, a broker at NAI The Dunham Group.
For the first time, lease rates are approaching $10 per square foot for industrial spaces that are already suitable for cannabis cultivation. Lamontagne said those spaces which have high electrical power capacity and appropriate zoning are renting for almost double what they were five to six years ago. While cannabis businesses are willing to pay higher prices, traditional industrial users are still unwilling or unable to pay those premium lease rates, he said.
For the last six to eight months, weve seen quite a bit of additional interest in anticipation of recreational passing, Lamontagne said.
None of the real estate professionals interviewed for this story would identify clients interested in cultivating marijuana or their building locations, citing confidentiality. But at least one industrial building the former Maine Rubber International tire warehouse in Gorham was identified in a Bloomberg news story from November as having been closed on by a group of investors last spring who were upgrading the building to market it to marijuana entrepreneurs. No tenants are involved with marijuana production in the building now, according to owner Jesse Abbott, who bought the building Nov. 30. A hardwood lumber distributor is leasing half the building and opening there soon.
The Greater Portland industrial market has seen a significant drop in vacancy rates and a modest rise in lease rates in the past five years. The vacancy rate fell from 7.86 percent in 2011 to 3.38 percent in 2015. Lease rates rose from $5.47 per square foot in 2011 to $5.62 per square foot in 2015.
After Colorado legalized marijuana, vacancy rates fell from 7.6 percent in 2011 to 3.1 percent in early 2015. By the next year, asking lease rates for industrial properties in northern Colorado reached $8.40 per square foot, compared with the national average of $6.30 per square foot, according to CBRE, an international real estate network. In Oregon and Washington state, brokers report fierce competition for warehouses suitable for growing marijuana indoors.
Cannabis businesses often pay a premium price for industrial spaces. In Oregon, cannabis business owners pay $12 to $18 per square foot, compared with an average of $5 per square foot for other businesses, according to Bloomberg.
Greg Boulos of Portlands CBRE | The Boulos Co. said he has seen significant interest from people in the marijuana business looking for warehouse spaces in the past year.
Boulos said most people looking for industrial space for marijuana cultivation need 5,000 to 10,000 square feet. They tend to want free-standing buildings without close neighbors, inexpensive rents and flexible lease terms, he said.
This is a business thats come out of the shadows, Boulos said. Its a very interesting time.
LOCAL CONTROL IS KEY
Maines legalization initiative was unique in that it included a strong local control element that allows municipalities to adopt zoning requirements for marijuana businesses or ban them entirely. In the past two months, more than two dozen towns have adopted temporary moratoriums on marijuana shops and commercial growing operations while officials consider local zoning requirements.
Landlords really need to pay attention to (local zoning) and understand how towns will handle marijuana cultivation and sales, said Kelleher, the attorney who practices real estate law. There are a lot of unanswered questions at this stage of the game.
The issue is coming into sharp focus in Wiscasset, where a real estate developer has proposed a large-scale recreational marijuana facility in a former industrial power plant. Wiscasset residents are expected to vote as soon as next month on a six-month ban on all marijuana businesses while town officials develop zoning rules for them.
Joseph Cotter of Mason Station LLC sent a letter to the Wiscasset Board of Selectmen asking for a meeting to discuss the possibility of turning Mason Station into a destination marijuana greenhouse, dispensary and production facility. The three-phase project would create a dispensary, culinary institute for cannabis edibles, restaurants, gift shops, social and recreational space for tourists, and a 50-room hotel.
This new business endeavor would include a major investment and provide a major revenue source to the Town of Wiscasset in the form of increased property taxes and sales tax related to the new legislation, Cotter said in the letter.
Cotter, who has not met with selectmen about the plan, did not respond to requests for comment.
LANDLORDS FACE CHALLENGE
Kelleher said dealing with cannabis businesses can be problematic for landlords for a number of reasons, but he expects that they will be able to charge premium prices as the industry grows in Maine. Renting to a cannabis-based business can be tricky for landlords because marijuana remains illegal under federal law, he said. The Department of Justice under the Obama administration has taken a hands-off approach to states that have legalized marijuana, but the same may not be true under the Trump administration.
Landlords renting to cannabis businesses will have to deal with issues that might not pop up with traditional tenants, such as odor problems or security concerns. Kelleher said landlords also have to consider what happens if a business is evicted or abandons a property and leaves behind marijuana. It would be illegal for a landlord who is not licensed by the state to take possession of the marijuana, as a landlord would with other property left behind, he said. Landlords also may require tenants to prove that they are properly licensed by the state to grow marijuana.
Landlords need to have some measure of reassurance that the tenant is properly licensed, he said.
Some investors looking to buy industrial spaces may run into issues with the banking industry, which is reluctant to deal with marijuana businesses. Kelleher said he and other attorneys at his firm have heard recently of banks adding to financing agreements requirements that landlords not lease space to marijuana businesses.
This is still a very young industry in the United States, Kelleher said. There are a lot of concerns and things to worry about, but theyre workable.
News Moderator: Katelyn Baker
Full Article: Marijuana Interest Driving Real Estate Deals
Author: Gillian Graham
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Photo Credit: Michael Fisher
Website: Portland Press Herald
