Grow rooms in Denver have sent the price of industrial real estate skyward. Pixabay
Laws Whiskey House is competing with grow operations for storage space. Eric Peterson
The marijuana boom in Denver has pushed some businesses to the suburbs. Eric Peterson
The warehouse district in Overland has numerous grow operations. Eric Peterson
There's a very tight market for industrial real estate space in Denver, thanks to the city's marijuana boom. As makers and manufacturers compete with grow operations, is the situation stifling entrepreneurial activity in the city?
Laws Whiskey House just started delivering bottles of its premium bourbon to restaurants and bars throughout the Denver metro area a few months ago, but the fledgling business already has outgrown its 10,000-square-foot warehouse at 1420 S. Acoma St.
Owner Al Laws has searched far and wide to find an additional 10,000 square feet of storage space -- whiskey barrels take up a lot of room -- but has discovered it's tough to compete with marijuana growers, who are gobbling up industrial space at unprecedented lease rates.
"We're looking outside of Denver proper," said Laws, noting that the company could develop a new building on a lot it owns next door to its existing facility but is reluctant to do so. "That seems like a waste of money when it's not our core business."
Since voters approved a ballot initiative to legalize marijuana for recreational use in 2012, growers have absorbed more than 1 million square feet of primarily low-quality space throughout 2013, according to the second-quarter industrial Market Trends report by Newmark Grubb Knight Frank. The total space occupied by the industry is more than 4 million square feet, and the report indicates expansion would continue during the second half of this year.
The burgeoning marijuana industry is at least partially responsible for the historically low vacancy rates over the last year. During the third quarter, vacancy rose slightly to 4.3 percent, up from 4.2 percent during the second quarter but down year-over-year from 5.8 percent.
The limited supply and high demand for space also is pushing lease rates up in Denver, which is more grower-friendly than many other municipalities. People in the real estate industry estimate that lease rates in the city have increased from about $4 a square foot to as high as $18 a square foot. They estimate the cost to purchase an industrial building has risen from between $30 or $40 per square foot to as much as $80 a square foot.
Metrowide, rates are up about 38 cents a square foot since the beginning of the year, according to the third-quarter Metro Denver Market Snapshot by Cassidy Turley. The report attributes the rising rates to economic growth causing existing companies to expand, as well as "marijuana users willing to pay well above market rates in order to secure space."
Businesses leaving
That shortage of space is creating bidding wars for what little space is available. Rocky Mountain Barrel Co., for example, relocated from 1,500 square feet in Denver to 8,000 square feet in Wheat Ridge, where weed growers must be affiliated with a retail or medical marijuana facility.
"We got outbid five consecutive times, mostly by marijuana growers," said Jon Levy, chief financial officer of the company, which imports barrels for sale to brewers throughout the Rocky Mountain region. "Lease rates took a pretty steep hike in Denver. We didn't have a choice. We had to pull the trigger right away."
Gloria Staebler, owner of natural history publishing company Lithographie, is being forced out of her 3,600-square-foot warehouse at Interstate 70 and Pecos Street -- the same building Rocky Mountain Barrel left. Tenants in the building, which sold last summer, include seven marijuana growers and the Crooked Stave brewery, which wants to expand into Lithographie's space. In July, the building's new owner offered Staebler a three-year lease for $18 a square foot, a significant increase from the $8 a square foot she had been paying.
"He said we had to sign it within 30 days or get out, so we started looking right away," Staebler said. She's still looking.
Staebler's broker, Scott Marcum of Marcum Commercial Advisors, said the area between Interstate 25 and C-470 from 6th Avenue to I-70 had a 33 percent industrial vacancy in 2012. That dropped to 6 percent at the beginning of this year and currently stands at just over 3 percent.
"There are a ton of people who have left Denver and headed west because the marijuana industry has made it impossible to find space," Marcum said.
Steve Art, director of economic development in Wheat Ridge, said Denver's loss of expanding businesses is a gain for his city. "Rocky Mountain Barrel is a great niche business," Art said. "It's a good employer we love to have."
Other communities benefiting from small manufacturers being pushed out of Denver include Arvada, Aurora and Adams and Jefferson counties.
"The majority of industrial space in Aurora is in one of three main business parks, which don't allow marijuana," said Jason Thomas of Avalon Realty Advisors, an agency that helps marijuana growers find warehouse space.
Marijuana just one factor
But the shortage of industrial space can only be partially attributed to the marijuana industry, said Brad Calbert, president of Colliers International in Denver. A robust economy is helping many small businesses expand, creating demand for smaller spaces ranging from 5,000 square feet to 40,000 square feet -- a size that is difficult to find in today's tight market. Building spaces that size is cost prohibitive because rising construction prices.
"It's going up about 1 percent a month," Calbert said. "With that is the schedule -- contractors are having a difficult time committing to a construction schedule."
With the state allowing new players to enter the grow industry in October, warehouse space is likely to become even more scarce. That's prompting growers to look for other alternatives, such as storage containers set up for marijuana cultivation or greenhouses, which are cheaper and quicker to build.
Thomas estimates there is likely up to 300,000 square feet of greenhouse space in development in Pueblo and another 500,000 square feet in Denver.
"Greenhouses go up quickly, so we're looking at adding to that supply," Thomas said. "And you're able to produce monster plants compared to indoors."
As moratoriums on recreational marijuana in other Colorado municipalities are lifted and more states legalize weed, lease rates are sure to drop and growers will search for better real estate deals. That could leave Denver with vacant warehouses and a manufacturing base that is not very diverse, Staebler said.
"Once we're established somewhere else, are we going to go back?" Staebler asked. "Who's going to do that. How will the city ever lure us back?"
This story originally appeared in CompanyWeek, covering makers and manufacturers in thew Rockies. Subscribe to the weekly newsletter here.
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Margaret is a veteran Denver real estate reporter and can be contacted
here.