OHIO MEDICAL MARIJUANA:
The In’s and Out’s of the Industry
The purpose of this paper is to take a deeper dive into the medical marijuana industry that is entering Central Ohio, the potential impact it could have on the real estate market across all sectors, and the process, cultivation, and legal aspects of growing and distributing marijuana. Since Ohio isn’t the first state to legalize this drug, we are able to compare and analyze the effects this industry has had on other states. For the purpose of this overview and based on the large datasets available to us, we’ve selected Denver, Colorado as our comparison.
EFFECTS ON REAL ESTATE
The medical marijuana industry is shaking up commercial real estate in Ohio. Although still deemed illegal by the federal government, the state of Ohio has legalized medical use, which means there is new demand for space to grow, cultivate, and dispense. It is difficult to pinpoint exactly how Central Ohio will tackle this from a legal aspect, but it is common to compare other markets that already practice legal use to understand what effects this will have on real estate. The state of Colorado, which legalized medical use in 2000, is the ideal baseline to compare Central Ohio because Denver was the first city of significant population to practice the usage of medical marijuana.
TYPE OF SPACE >>
In Denver, mainly class B and C properties are used for cultivation, retail, storage, processing, etc. Looking at Central Ohio, it makes sense that class B and C properties would also be the ideal target for this use. These properties are classified with lower rents and less property to maintain. Growers and cultivators prefer to maintain a low profile and seek non-descript sites.
INDUSTRIAL FOOTPRINT >>
The city of Denver has a medical and recreational marijuana footprint of 4.2 million square feet, which is 2.9% of the total warehouse footprint. Ohio will initially have a maximum medical footprint of 336,000 square feet, which is only 0.24% of the total warehouse footprint, but this footprint is subject to expansion based on demand of the product. Members of the Ohio Medical Marijuana Control Program (OMMCP) are expecting expansion as more dispensaries and licenses are permitted. It is important to keep in mind the supply available for warehouses, as well as, the counties that permit medical marijuana have large effect on the size of the footprint.
RENTAL RATES >>
In Denver, industrial warehouse properties experienced an increase in rental rates to $14.19 per square foot – that is 2-3 times higher than the average price due to a significant increase in demand. Other markets have seen similar demand for space causing an increase in rents, which allows us to draw the conclusion that without legal implications, Ohio will see similar rate increases. Currently, the average lease rate for an industrial warehouse property in the Central Ohio stands at $3.07 per square foot. Applying those rate increases in real-time, the state can expect to see lease rates for medical marijuana tenants jump to about $10.00 a square foot.
Lease rates are directly affected by vacancy in a market. Denver’s industrial vacancy rate fluctuated between 4 and 5 percent at the time the metro prepared for legalization. Since the market was already relatively tight, lease rates increased accordingly. Central Ohio is very similar in this aspect, with vacancy rates hovering between 4 and 6 percent and is currently a landlord driven market. It is safe to predict that the Ohio market will see similar lease rate increases.
LANDLORD OBSTACLES >>
This new industry could cause increased pain for landlords. Owners of marijuana-leased industrial buildings could encounter industry-specific risks that include federal forfeiture, cash-paying tenants, and the possibility of damaging the structure, as well as smell of the overall property. Denver experienced many landlords unable to lease to marijuana tenants because of federal laws, and costly electric and HVAC upgrades required for cultivation and storage. They also face laws that prevent traditional banks and lenders from financing properties associated with marijuana. These obstacles make the availability pool for warehouses even smaller and cause rates to increase. Also, many municipalities have already said “no” to this type of usage. Major Central Ohio cities that have completely banned usage include: Dublin, Worthington, Lancaster, Plain City, and Canal Winchester.
The average sale prices of marijuana-occupied properties have also experienced significant increases. In 2014, Denver’s average sale price was $98 per square foot. Today, the average sale price for these properties is $115 per square foot – a 17.6 percent increase in three years. The Ohio market expects to see the same demand. Currently, the average price per square foot for industrial properties in Central Ohio varies between $81.00 and $85.00 a square foot. In the future, Central Ohio can expect to see similar increases in year over year value as the industry grows. Due to this trend of significant annual increases, many marijuana-based tenants will look to buy; however, the initial sale price to the tenant will see a steep increase.