Marijuana industry faces steep lease rates in tight market

  • By DJ Summers
  • Thursday, February 25, 2016 11:31am
  • NewsBusiness

ANCHORAGE — Marijuana business can expect a hefty square footage price for retail, cultivation and manufacturing leases within the Municipality of Anchorage once they open for business.

On Wednesday, the Alaska Marijuana Control Board started accepting business license applications. In the meantime, several industry sources report being charged several times the average per square footage lease rate for their planned marijuana operations, or entering into lease agreements that give a percentage of business profits to the landlord.

This follows an observed pattern of real estate investment in both Washington and Colorado, where real estate brokers and media reported industrial warehouse space in marijuana-zoned areas being leased up to four times the average rate.

A combination of market factors and regulations drive prices up for marijuana-friendly buildings and make owning such buildings a lucrative enterprise.

On Feb. 9, the Anchorage Assembly passed an amended land use ordinance requiring setbacks between marijuana business and schools, churches, recreational facilities, and child-centered facilities. However, the assembly reconsidered those land use regulations at a Feb. 23 meeting.

Market rates for these zones go up as scores of marijuana businesses vie for limited space.

The land restrictions create pockets of proper zoning in B-3 business zones for retail and industrial zones for cultivation facilities, largely concentrated in Midtown-Spenard and South Anchorage. Wasilla’s recent ban on commercial marijuana intensifies the demand for space in Anchorage as Mat-Su entrepreneurs look for opportunities farther south.

In turn, landlords see an opportunity to charge two or three times the average rate, in keeping with real estate patterns in other states where commercial marijuana has been legalized.

Because of residency restrictions on licenses, Outside investors eyeing Alaska cannabis have no other route beyond real estate speculation, seeking to make profits through lease rates. 

Beyond profit motive, investors have a familiarity with real estate they don’t have for marijuana.

Lower 48 real estate investors already control a sizable portion of Anchorage industrial space. Seattle’s Slattery Properties owns 15 industrial buildings in Anchorage, and has been present in Anchorage since 1989.

Slattery Properties recently outbid Chris and Rick Euscher, who are planning the marijuana cultivation facility RC Tinderbox, on an industrial building, leading to some industry speculation that the company plans to corner the cultivation market.

Michael Slattery, the owner of Slattery Properties, said his company is not actively courting the marijuana industry, and that his properties’ conformity with marijuana zoning requirements is happenstance.

“We have not purchased anything outside of our core competency,” said Slattery. “The properties we have purchased add synergy to the other seven properties we own in the Cinnabar Loop (in South Anchorage). It’s not our intent to specifically target that industry.”

Insurance rates are too high for Slattery to want a large portfolio of marijuana businesses — Lloyd’s of London charges rates up to 250 percent above average for marijuana-related coverage — and Slattery himself said he has “moral issues renting to marijuana types.”

The building in question sits in South Anchorage, home to the vast majority of marijuana-zoned industrial space. Slattery has owned properties in Cinnabar Loop dating back to 1989, according to municipal records.

Though the company isn’t looking for marijuana clientele, Slattery said he does “keep an eye” on market trends.

“I’m not saying we’re going to be looking for them, but as market forces bring the industry out, if they’re socially responsible, and if they meet the regulatory requirements … they need to go somewhere,” he said.

Real estate investment and the resulting price increases for marijuana entrepreneurs has been a fixture of the market since Colorado legalized recreational marijuana in 2014. 

Investor networks from the Lower 48 say real estate is often the first choice for potential investors, as it doesn’t require any knowledge specific to cannabis business and bypasses the residency restrictions in each state.

“Probably some of the most prominent and prolific investment in the cannabis industry has been done in real estate,” said Steve Berg, who co-founded ArcView Group, an investor network geared explicitly for cannabis business investment. “The residency restrictions many states prohibit or at least restrict the ability of non-state residents to acquire interest. But there’s nothing to stop them from being landlords to a cannabis companies.”

Berg said cannabis investors view real estate as the least risky and least restrictive ways to seed their money. Residency restrictions like Alaska’s — which bans all non-resident money from Alaska marijuana licenses — channels investment dollars that might otherwise have gone directly into business expenses.

Cannabis businesses make for attractive tenants, Berg said. Beyond the newness and novelty, they are sound investments, with business plans and good profitability. If regulations or market conditions turn the business belly up, the investor still has the building.

“From a risk-reward perspective, that’s very attractive to many investors that are coming out. … If it plays out in Anchorage as it does in every other jurisdiction, the areas zoned for cannabis business inevitably see premium lease rates,” said Berg.”

Already-legal marijuana markets experienced both an organic growth in marijuana-zoned building values and an increase in marijuana-specific premium rates from landlords.

Real estate owners raised prices on marijuana industry businesspeople in Washington when it rolled out its recreational cannabis industry. 

In Washington in 2013, Seattle area landlords charged marijuana real estate deals of 150 percent to 200 percent premiums, reported the Seattle Times.

“One unnamed party recently paid a $50,000 premium — above the lease rate — for a storefront outside of Seattle,” read the Times article.

“Greta Carter, a Seattle marijuana activist who passed on the tip, said the leaser paid it because the location was a prime spot, albeit grudgingly.

“‘We’re accustomed to paying a premium in the cannabis industry, but you cross a line when you want $50,000 up front,’ she said.”

In Denver, the “green rush” spiked prices for properly zoned industrial areas to highs not seen since 2004, reported the Denver Post. In 2015, industrial lease rates climbed to $7.05 per square foot. Like Seattle, marijuana tenants were often asked to pay two or three times the average lease rate.

DJ Summers is a reporter for the Alaska Journal of Commerce. He can be reached at daniel.summers@alaskajournal.com.

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