California Weed

Legal marijuana causes warehouse rent to skyrocket in Sacramento – 4 or 5 times normal

Legal pot growers are pushing prices and rents for industrial properties to unheard-of heights in some areas of the city of Sacramento.

Warehouses and light-industrial buildings are selling for twice the usual asking prices, and rents have skyrocketed to four or five times normal in the industrial area between Power Inn Road and Watt Avenue in the city’s southeast area, commercial real estate brokers said.

The heated market for pot-growing locations – leading up to next year’s legalization of recreational marijuana in California – is soaking up vacancies left over from last decade’s devastating recession, but it’s also forcing longtime tenants to relocate and driving up rents citywide, brokers said.

“The cannabis industry in the Sacramento market has been disruptive to the traditional industrial market,” said Michael Luca, an industrial real estate broker with CBRE in Sacramento.

“It could turn out to be a benefit to the market and drive rates higher, but it is upending and causing confusion for traditional industrial occupiers – small businesses that employ a reasonable number of people,” such as construction firms, pest control companies and landscape maintenance outfits, Luca said.

Driving the trend is Sacramento’s embrace of marijuana growing operations inside city limits and its creation of a regulatory framework to let the firms operate legally – and to collect taxes and fees from them.

State voters approved the legalization of recreational marijuana last year under Proposition 64, but cities and counties retain much of the say over how and where legal weed can be grown.

Sacramento is one of the only major urban areas in the state that’s adopted pot-growing ordinances and made it clear that cannabis cultivators are welcome, said Hezekiah Allen, executive director of the California Growers Association, a Sacramento-based organization that represents pot growers.

“Sacramento’s done a great job of digging in and putting a system together,” Allen said. “The city got out in front. They figured out what they were interested in and created opportunities for those types of projects to move forward.”

The only other city that’s done a comparable job is Santa Rosa, he said.

That’s why Sacramento is attracting a range of pot-minded businesspeople, he said, including growers from other parts of the state seeking legal legitimacy.

“Existing businesses that have been operating in a gray area are getting into more permanent facilities,” he said. Some want to increase production and have access to Sacramento’s network of highways that connect it to the Bay Area and Los Angeles, where warehouse space is more expensive, he said.

Allen said the city’s industrial real estate market likely will experience “a bit of a bubble in the next few years,” but he said he thinks there will “probably be some real sustained value.”

More than 100 businesses were seeking special permits from the city of Sacramento to run indoor marijuana growing operations as of July, and some officials predicted that up to 200 might apply before the end of the year. City authorities have granted more than a dozen conditional use permits to marijuana operations since Sept. 1, online records show.

Growers and other business operators hoping to get permits have lined up to rent and buy warehouses and light-industrial spaces at exorbitant prices.

Mark Demetre, executive vice president of Colliers International in Sacramento, said would-be marijuana growers have been buying buildings for $100 a square foot that a year ago were selling for $50 a square foot. One 40,000-square-foot industrial building in the Power Inn Road area sold for $100 a square foot, or $4 million, and the owner decided to retire early, he said.

Spaces that were renting for 50 cents a square foot in the city’s southeast industrial area now are renting for $2 or $2.50 a square foot, he said. Some landlords refuse to rent to marijuana growers, but others aren’t renewing leases with longtime tenants to secure the higher-paying cannabis renters and buyers, he said.

That, in turn, is pushing up rents in other parts of the city such as North Natomas, he said.

“Manufacturers have to relocate to different submarkets because anything in the city will be priced out of range,” Demetre said, suggesting they may have to look elsewhere in the county and beyond.

Vacancy rates for industrial real estate soared during the recession, reaching up to 20 percent in some parts of the Sacramento region. Those rates have generally dropped to around 7 percent, but in the Power Inn corridor, the vacancy rate is around 4 percent, Demetre said.

Asked if the legal weed industry was good or bad for the city’s real estate market, Luca said, “The intelligent answer is it’s unknown at this point. What’s happening with the cannabis industry may be unhealthy for the market as a whole. When there’s a run-up, it usually leads to a correction at some point historically.”

Pot still isn’t legal under federal law, and growers operating legally under state law could be put out of business by federal enforcement, he noted. Agents could even seize the buildings the growers occupy.

In short, Luca said, “It’s really uncharted territory.”

Hudson Sangree: 916-321-1191, @hudson_sangree

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