Cannabis-Related Real Estate Demand Rises in San Diego After Legalization

Cannabis-Related Real Estate Demand Rises in San Diego After Legalization

BY LOU HIRSH (via CoStar Group)

Industrial, Retail Approvals Show Property Surge as States Make Marijuana Legal

Demand for marijuana growing facilities in California, above, is playing out in San Diego.

Demand for marijuana growing facilities in California, above, is playing out in San Diego.

More than half of San Diego’s planned marijuana production sites are now taken, following the recent approval of three additional industrial properties, setting the stage for competition for the remaining locations that may include applicants’ attempts to slow the approval process for rival businesses.

The San Diego City Council this week cleared the way for three large existing industrial locations for marijuana production, bringing the total number of formally approved industrial spaces to 21, more than half of the 40 allowed by city law. City data indicates that San Diego has also approved 19 of an allowed 36 retail locations.

The process shows the real estate demand that follows the legalization of marijuana sales, a process that is spreading across U.S. states and Canada. The San Diego approvals are part of a larger attempt to support recreational cannabis sales — and its tax revenue — made legal by the state of California two years ago when state voters passed Proposition 64. By a voter margin of 56 to 44 percent, California at that time became the fifth state to legalize recreational marijuana, following Colorado, Washington, Oregon and Alaska; several others have since joined that roster.

At its Dec. 3 meeting, the San Diego City Council in an 8-0 vote affirmed permits for marijuana cultivation facilities planned for a 21,210-square-foot space at 4655 Ruffner St., in the city’s Kearny Mesa area; a 40,536-square-foot building at 9350 Trade Place in the Mira Mesa neighborhood; and an 86,288-square-foot building at 2220 Niels Bohr Ct. in the Otay Mesa area.

The San Diego City Council affirmed permits for marijuana cultivation facilities for a few properties, including this 40,536-square-foot building at 9350 Trade Place.

But the process of obtaining marijuana production site permits has become extremely competitive. As of April of this year, San Diego had at least 66 applicants for the 40 available citywide locations, according to local news reports. City data indicates there are now 30 pending location applications for the remaining 19 slots.

Local land use attorney Gina Austin, who represented two of the recently approved business operation applicants, said a vexing problem has arisen from the current approval process: marijuana production site applicants are using the established review system to block or slow down the approval process for competing operators.

Appeals against proposed sites before the city council this week argued that the applicants needed to undergo an environmental review before receiving approval. The council rejected the appeals, citing an opinion from the city attorney’s office that state law requires such reviews only for new-construction projects, not businesses locating in existing buildings.

In at least two of the three location cases reviewed at the council meeting, Austin said, those who formally appealed prior city decisions are tied to other parties with applications pending before the city for their own cultivation sites. In fact, city council members noted that none of the people who challenged the three latest sites showed up at the meeting to make their case.

Austin called on the city to stop the “gamesmanship” that currently allows applicants to stall the approvals of competing businesses, which might be ahead of them in the application process, by filing baseless appeals. “This is just a mechanism to try and delay the process because we’re only allowed to have 40 marijuana production facilities in the city,” Austin said. “You have all this jockeying among the applicants — capitalism at its best, I guess.”

Other California cities have devised similar location and process restrictions for building out the commercial infrastructure made legal by Proposition 64, many of which took effect this year. Los Angeles closed its application period for cannabis-related businesses at the end of November and had approved a total of 169 mostly retail locations as of Dec. 6, according to the city website. Most have been granted temporary licenses and are yet to begin operations.

Sales and production have also gotten underway gradually this year in cities including San Francisco, Oakland, San Jose and and Berkeley. San Diego and other cities have also established restrictions on locations that cannot host cannabis-related businesses, such as places that are close to schools and city parks.

Many other California cities are still finalizing how to tax and regulate recreational marijuana. But the statewide impacts are expected to be considerable when those mechanisms are fully up and running.

“Given that California is the most populous state in the nation, its 2018 entrance into the recreational marijuana market is certain to have a major and immediate impact on demand for marijuana-related real estate,” said the real estate consulting firm Integra Realty Resources, in a report this year.

Operators are mostly smaller firms in the current climate, and they will need to be well-capitalized to set up shop. Among drawbacks, the Integra the report said, is that most federally insured lenders involved in industrial and retail lending will not allow marijuana-related companies to be tenants in buildings on which they are lending. “Lenders fear running afoul of federal laws and guidelines given that cannabis remains illegal at the federal level.”

Publications including Marijuana Business Daily have projected that U.S. retail sales of cannabis are expected to total between $12 billion and $17 billion by 2021, up from a projected $6.7 billion to $8.8 billion for 2018.

Most of the local approved facilities have not yet begun operations. San Diego officials anticipate that the city will garner $5.5 million in revenue for the 2019 fiscal year, which began July 1, resulting from passage of a local non-medical cannabis tax, but that could rise significantly in coming years.

Measure N, approved by San Diego city voters in 2016, imposed a tax of 5 percent of monthly gross receipts — slated to rise to at least 8 percent but possibly as high as 15 percent in July 2019 — that applies to the transport, manufacturing, cultivation, packaging and retail sales of marijuana.

In Colorado, among the first states to legalize recreational marijuana in 2014, the impacts on industrial real estate have been significant. A June 2017 report by brokerage firm CBRE Group noted that Denver industrial warehouse space being used for marijuana growing operations was commanding lease rates two to three times higher than average for comparable properties, along with 25 percent price premiums on property sales, because of factors including rising demand and restrictions placed on the number and allowable locations for those facilities.