QUINCY, Mass. — At the edge of an industrial park in this suburb south of Boston, past a used-car auction lot and a defunct cheese factory, is an unmarked warehouse bristling with security cameras and bustling with activity. Until recently, the cinder-block structure was home to a wholesale florist, a granite cutter and a screen printer. Today, it is home to just one tenant: a medical marijuana operation called Ermont.
Legalized marijuana has already upset societal norms, created a large legal gray area and generated a lucrative source of tax revenue. Now it is upending the real estate market, too.
In the more than two dozen states that have moved to legalize pot, factories, warehouses and self-storage facilities are being repurposed for the cultivation and processing of potent marijuana plants and products. Suburban strip malls and Beaux-Arts buildings have been reimagined as storefronts selling pre-rolled joints and edibles.
And because the marijuana business comes with added baggage, landlords and property owners are charging a premium for new tenants working in the cannabis business. In Quincy, Ermont is paying above market rate for the previously dilapidated 36,000-square-foot building.
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“The landlord knew he was sitting on a gold mine,” said Zach Harvey, one of Ermont’s financial backers.
Commercial real estate developers say they have never seen a change so swift in so many places at once. From Monterey, Calif., to Portland, Me., the new industry is reshaping once-blighted neighborhoods and sending property values soaring. In some Denver neighborhoods, the average asking lease price for warehouse space jumped by more than 50 percent from 2010 to 2015, according to an industry report. In the city over all, there are five times as many retail pot stores as stand-alone Starbucks shops.
Wall Street is even cashing in. A few months ago, a real estate investment trust focused on leasing out warehouse space to growers started trading on the New York Stock Exchange.
The sharp rise in property prices follows the booming market for legal marijuana. Sales of legal cannabis reached $6.7 billion in the United States last year, and are expected to top $20 billion by 2021, according to Acrview Market Research.
“This is a new segment of the industrial real estate market that is being created in front of our eyes,” said George M. Stone, a longtime real estate executive now focused on the pot business. “It’s a huge industry and only getting bigger.”
Yet there are simmering concerns that a new real estate bubble might be forming. Right now, millions of dollars are being spent to make old warehouses suitable for cannabis cultivation. Warehouses are in vogue for a variety of reasons: They are big enough to hold thousands of plants, can accommodate the needed climate controls, and are private and relatively easy to secure. What is more, because it is still illegal to transport marijuana across state lines, pot must be grown in the state where it is sold.
But as the industry matures, many executives believe that tenants and investors spending big money on such projects could soon find themselves underwater. Ultimately, the theory goes, growers are likely to turn to less expensive greenhouses. And if federal regulations about the transportation of marijuana loosen, dispensaries in Boston could soon sell buds grown in California greenhouses.
There is also a lingering threat that the federal government, which still classifies marijuana as an illegal substance, could crack down on the burgeoning industry. The attorney general, Jeff Sessions, has already expressed his disdain for the legalization movement.
But for now, those concerns are being tossed aside for what looks like a can’t-lose opportunity for everyone involved: Building owners can charge above market rates, real estate groups can profit by subleasing to growers, and growers can make enough money to afford the steep rents.
So far, the uptick in property prices from the marijuana business is concentrated in some of the states that have legalized medical and recreational use. And in some places, the industry is only getting started because voters made their decision just a few months ago.
Maine’s law allowing recreational cannabis use took effect in January. Factories and warehouses near Portland that once produced and stored parts for model homes, steel beams and tires are already filled with budding marijuana plants. “These are factories that were sitting empty,” said Drew Sigfridson, a local broker with the Boulos Company.
In California, a state that approved medical marijuana in 1996 and recreational use in November, greenhouses in Monterey County that once produced roses and tulips now grow marijuana plants with names like Grape Ape and Buddha’s Sister. Chuck Allen, a commercial broker with Keller Williams Realty who works in Monterey, said that in the last few years, more than 20 major transactions worth roughly $100 million have closed, and prices are on the rise.
“Last year, you’d have paid about $2.5 million for a 10-acre parcel with greenhouses,” he said. “Today, you’d pay $5 million.”
And in Quincy, Ermont is paying a premium for its unglamorous space. Ermont took over the building in 2014, though it began selling marijuana to the public only late last year. Before opening its doors, Ermont paid rent on the warehouse for two and a half years.
During that time, Ermont gutted the building, spending about $4 million installing heating, ventilation and air-conditioning, as well as lighting, gas and insulation. Walls were torn down, and the floor plan was reconfigured to accommodate several large grow rooms, a retail space and a laboratory straight out of “Breaking Bad,” where in-house scientists distill potent cannabis oils.
“It was a full renovation, including the roof and resurfacing the outside,” said Scottie Gordon, Ermont’s chief operating officer. “We knew it was going to be very expensive. This wasn’t just another greenhouse.”
Denver’s Not the Only Winner
Denver has emerged as America’s de facto pot capital. Since Colorado legalized marijuana for recreational use in 2012, hundreds of stores selling pot have opened, and enormous growing operations have set up shop. Legal cannabis sales topped $1 billion in the state last year.
The impact on the local real estate market has been equally big.
From 2009 to 2014, 36 percent of new industrial tenants were marijuana businesses, according to the report on the city from CBRE Research, a commercial real estate company. Nearly four million square feet of industrial space was being used for cultivation in 2015, according to the report, about 3 percent of the city’s warehouse space. Warehouse vacancy rates in Denver fell to just 3.7 percent in 2015, down from 7.5 percent in 2010.
The industry has taken especially deep root among the low-slung warehouses in north Denver. Buildings used for growing marijuana are easy to spot — many are distinguished by extra lights and security cameras. But “I wouldn’t have to point it out,” said Brian Vicente, a partner at Vicente Sederberg, a Denver law firm that specializes in marijuana issues. “You can smell it.”
Retail spaces are just as hot. By 2015, there were upward of 200 marijuana stores in Denver, occupying high-end storefronts and former gas stations.
The spike in demand has been good for landlords, who often charge two to three times market rates for spaces used for cultivation or sales.
“It’s a tax these guys are used to paying because it’s still federally illegal,” Mr. Vicente said.
Denver’s boom stands out, and marijuana has become such big business that an abundance of supply is starting to bring down retail prices, which could ultimately bring down real estate prices.
But Denver is certainly not alone. The growth has become widespread enough, and with generous enough profits, to attract some of the country’s most prominent real estate investors.
Alan Gold was chief executive of BioMed Realty Trust, which leased out space to life sciences companies, until it was sold to the private equity titan Blackstone for $8 billion in 2015. Now he is a co-founder of Innovative Industrial Properties, a real estate investment trust that buys buildings, renovates them and leases out space to medical marijuana growers.
The company went public on the New York Stock Exchange last year and is valued at roughly $60 million, down about 10 percent since it began trading. “We’re really the first cannabis-related I.P.O.,” Mr. Gold said.
The largest property in Mr. Gold’s portfolio is a 127,000-square-foot facility — a space more than twice as large as the White House — outside New York City. The building can handle both a large-scale growing operation and facilities to refine marijuana buds into edible products, and Mr. Gold is planning to open similar sites around the country.
“It’s a way for us to invest in this industry on a national basis,” he said.
Other entrepreneurs are following suit. Mr. Stone was an executive with the Witkoff Group, the real estate investment company that bought the Woolworth Building in 1988. Today he is chief executive of Kalyx Development, a private real estate investment trust focused on the pot business.
Kalyx owns nine buildings in four states, including what was once a disk drive manufacturing facility in Eugene, Ore. Mr. Stone said he planned to expand into three or four more states this year, driven largely by demand from investors who want to put money to work.
“There’s capital that is starting to stack up on the sidelines,” he said. “They’re looking for how to participate, and they’re looking for institutional-grade projects.”
Assessing the Risks
Innovative Industrial Properties, Kalyx and other similar groups are following the same strategy: buy buildings, retrofit them and lease them to commercial or medical marijuana growers. But it can often cost millions to turn a vacant warehouse into a facility suitable for cannabis cultivation.
Rob Lally, who once owned strip malls and shopping centers but is now courting marijuana tenants with Commerce Real Estate, is converting a former tool factory in Leicester, Mass., into a cultivation center. He expects to spend $3 million to $4 million on the project, a sum that will take years to recoup.
That big capital outlay is just one of the risks associated with the booming marijuana real estate business. Electricity costs alone can be budget-breaking, as plants need powerful lights to flourish. Some owners also face expensive battles with mold and other related wear and tear, as the warehouses were not conceived as places for a very humid environment.
Add to that financial mix the fact that in mature markets like Denver, the retail price of marijuana is coming down as supply outstrips demand.
“The price will come down so low that they’ll have a hard time justifying paying $10,000 a month just for lighting,” Mr. Vicente said. “That warehouse that you spent $10 million renovating is only going to be valuable for so long.”
Finally, there is the elephant in the room: the question about pot’s legal status.
While more than half the states have voted to legalize marijuana in some way, it is still illegal at the federal level. As a result, the entire business of legal marijuana — already worth billions of dollars a year — is predicated on the assumption that the federal government won’t enforce its own laws.
The Obama administration largely left states alone, but there are signs that the Trump administration may not be so hands-off. “I reject the idea that America will be a better place if marijuana is sold in every corner store,” Mr. Sessions, the attorney general, said recently, adding that marijuana was “only slightly less awful” than heroin.
The legal gray area has already left financing projects challenging. Because the federal government considers marijuana illegal, most banks won’t provide mortgages to buildings used by the industry. When Ermont took over its space in Quincy, it had to pay for the cost of the building owner to refinance with a local bank that would assume the risk.
Any stricter enforcement of the laws by the federal government could put the real estate investments into immediate trouble. But even a move to legalize marijuana at the federal level would vastly change the economics. It could allow interstate commerce, meaning that marijuana grown relatively cheaply outdoors in California could be shipped to Massachusetts, where growing is far more expensive, potentially putting the East Coast producers out of business.
Nevertheless, investors are pressing ahead with ambitious plans to grow ever more marijuana, wherever they can.
The opportunity is just too big to ignore.
‘Out of the Shadows’
On a chilly Wednesday in Quincy, the line was out the door, stretching into the parking lot of the industrial park. After being open for just two hours, Ermont had already sold $10,000 worth of products. Patients were lining up to buy pungent buds, as well as cannabis-infused olive oil, peanut butter and honey. Soon the dispensary will offer a deodorant that can get you high.
Today Ermont uses just about half of its retrofitted warehouse. But demand is so strong, the company expects it will soon take over the rest of the space to grow and process more plants.
A short drive away in Brookline, the store in an old Beaux-Arts bank was also doing a brisk business. The products inside are made by another dispensary, New England Treatment Access, which grows its crops in a warehouse in southern Massachusetts. NETA wanted some pizazz for the customer experience, so it leased the bank.
Inside, skylights and tall arched windows flood the former lobby with sunlight. Gilded Corinthian columns reach up to a domed turquoise ceiling. Where bank tellers once handed out cash, employees now hand over buds of Tangerine Haze and Master Kush.
The decision to lease the former bank wasn’t cheap for NETA. The group entered into a lease years ago and paid rent while it sat empty.
“The holding costs there were significant,” said Norton Arbelaez, director of government affairs for NETA. But, Mr. Arbelaez said, “we wanted to take this industry out of the shadows,” and a flashy retail space was one way to make that happen.
So far, it seems to be working. On a busy day, NETA can sell marijuana buds, pre-rolled joints and cannabis-infused chocolates worth as much as $100,000.
That is more than enough to keep the lights on.
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