Herzog: “The next big step will be something happening at a federal level. Then you will see brand-name consumer companies growing and selling, and you will see institutional players in real estate, like REITs, come full-force into the market.” 

SEATTLE—A maturing market for cannabis in State of Washington is leveling off. According to Vanessa Herzog, SIOR, CCIM, the SVP and partner in the Seattle/Tacoma office of Lee & Associates, this is due in part to a winnowing of providers in the face of leveling of demand from the consumer, high rents and locational restrictions in a market defined by state borders.

But, if the apparent tide inside the Beltway continues to shift, there could be an influx of institutional capital and an open-border environment that will re-ignite the market. Herzog sat down with GlobeSt.com recently to explain what she is seeing.

GlobeSt.com: Vanessa, what is the status of legalization in the state of Washington?

Vanessa Herzog: It has been legal now for about six  years. Today, a lot of the same players are still in the market, but the industry has leveled out, not only in pricing but also in real estate purchase and lease deals. As far as state controls are concerned, it is still restrictive in terms of what jurisdictions will allow the use both on the growth side and in retail.

GlobeSt.com: In what ways restrictive?

Herzog: Some jurisdictions will not allow either growth or retail. Others restrict one but not the other. So what you find are jurisdictions like Tacoma or Lacey that have concentrations of grow operations, servicing large parts of the areas retail operations.

GlobeSt.com: So what is happening with rents?

Herzog: We started five years ago probably in the 60-to-65-cent shell rate per month for growers in an industrial building. This was during a time that was still affected by higher vacancy rates, and flat rents.  At that time these rents were 30 to 50 percent above market, ut market rates generally have risen, so we find a 65-cent shell rate to be the norm in our core markets of Seattle/Tacoma.Owners are no longer getting a premium for marijuana renters.. Some of the growers took down very expensive space that they cannot afford now because profits are not what they thought they would be.

GlobeSt.com: Plus, it is expensive space to fit out.

Herzog: High costs are reflected in the infrastructure: Electical power, HVAC, Grow equipment and Air Quality regulations, plus construction costs that have risen across the board. The power and HVAC requirement alone is double or even triple that of normal distribution. When we were doing these leases five years ago, those tenants were spending about $100 a square foot in tenant improvements and most of that was in power, HVAC and grow operation upgrades.

GlobeSt,com: Let's talk just a bit about the retail market, though I know your prime focus is industrial.

Herzog: There might be more of a premium on the retail side since sellers are more limited in where they can go. But retail product prices across the board have been falling. There were a couple of REITs that came in with the plan to buy buildings and lease to marijuana sellers. It was not nearly as successful as they expected because they wanted really high rents that the market could no longer support.

GlobeSt.com: So the market of potential tenants is growing thin?

Herzog: We have definitely seen that. In the past two years, I have had maybe four calls from growers—and they are smaller players, five or 10,000 square feet. So there has been a definite cutback, and only the strong survive, those that are well-capitalized.

GlobeSt.com: Plus there are the restrictions in terms of federal banking regulations, yes?

Herzog: Landlords are aware of the Federal regulations that oversee this industry.  While the Federal oversight is allowing States to legalize this industry, it is still a federal crime.  With California legalizing recreational use, we think this will bring pressure to the Fed's to relax their regulations and help this industry become fully legal.  There is too much money benefitting the States to ignore this industry for much longer

GlobeSt.com: So if the market is leveling off, where are state revenues?

Herzog: Last year, marijuana in the state produced just over  $341 million in tax revenue, representing $1,486,000,000 in total sales.   This number was still up from 2016, but not as sharp in increase as the 2014 – 2016 revenue numbers.  Total number of Growers is 1,360 and Retailers is 485 in the State.  I think the industry will level out next year.

GlobeStcom: Unless there is movement from Washington, DC.

Herzog: There was a time when title companies would not insure buildings used for the purpose of growing or selling. About six months ago a few title companies changed that. So some restrictions are lifting, and we are seeing less of a focus on the industry in Washington, DC. The next big step will be something happening at a federal level. Then you will see brand-name consumer companies growing and selling, and you will see institutional players in real estate, like REITs, come full-force into the market. I am not sure how far we are from that. We just have to wait and see.