Cannabis Industrial Facilities Generate Premium Rents

Cannabis real estate is generating premium rents for industrial facilities in San Diego. According to research from Newmark Knight Frank, cannabis-zoned industrial product is capturing rents $1 or more per square foot than similar quality product not zoned for cannabis usage. The cannabis market in San Diego is still new, but the leasing activity is already exposing the substantial impact the industry will have in San Diego.

“The primary impacts have been to lease rates and availability,” Paul Britvar, a director at NKF, tells GlobeSt.com. “Many cannabis uses require buildings with substantial power and cannabis operators are able to pay a premium for the space because of the high profit margin their business creates therefore not only are rental rates higher than average in buildings where cannabis operators lease, but the cannabis uses often seek buildings with exceptional power which removes these buildings from the market for industrial uses.”

These trends have resulted in higher rental rates and higher demand. There is higher than average demand for available buildings in the market, raises landlords expectations on their earnings potential from their properties, and limits the availability of inventory that other users have to the choose from as well as raising the average rents by virtue of scarcity,” says Britvar.

In Central San Diego, there is a significant increase in rental rates for cannabis buildings. “In central San Diego many industrial buildings approved for a cannabis use are leasing out for rental rates in the $2.20 per square foot to $2.80 per square foot range which contrasts sharply with average lease rates which have historically been anywhere in the range of $1.20 to $1.50 per square foot for similar properties,” says Britvar.

The market has also had a significant impact on investment activity and pricing for class-B and class-C industrial product. “The cannabis renaissance in Southern California has had visible impacts on industrial real estate pricing,” says Britvar. “Many cities have encouraged cannabis operations in buildings that are zoned industrial to minimize the proximity impacts to residential housing and high-foot traffic commercial uses—with the underlying goal of also minimizing exposure to youth.”

This trend to separate cannabis usage from the general public has also limited the availability of available product. “This narrows the range of options for cannabis uses to a small pool of buildings, a pool that is already highly sought-after by churches and indoor recreational facilities since cannabis zoning requirements mirror those of these non-industrial alternative uses,” adds Britvar.