With the legalization of recreational marijuana set to become law next July, could the Maryland warehouse/industrial asset class soon have another high-demand use in its future?
The answer could be “yes,” based on the history of leasing activity in nearly 20 other states where cannabis is legal, the industry’s success in surviving legal challenges from special interest groups and the General Assembly sorting out requirements (around regulation, taxation, etc.) pertaining to legalized marijuana.
This new market opportunity, however, comes with some challenges. Retrofitting an existing building to support growing, harvesting and distribution operations is expensive and complicated, and vacancy rates for this product type remain extremely tight throughout Maryland.
“Once legislation passes, cannabis growers quickly flood the market in search of space to grow and sell their product and there is a bit of a wild, wild west component to it because many different groups are vying for just a few available licenses,” explained Allan Riorda, President of Lee & Associates | Maryland, which has sister brokerage offices internationally and in several states that have legalized marijuana. “Certain owners and landlords shy away from this use, including many public companies and those with institutional backing, which eliminates a large segment of the market. There is also concern about executing a lease with recently formed entities, which may not have a long financial history. Since it’s not legal on a federal basis, this adds another layer to the complexities. Also, due to the costs involved with the building’s retrofit, many growers have opted to buy a facility rather than lease.”
Riorda added that identifying potential sites to accommodate the use might prove difficult, based on the scarcity of available warehouse/industrial space in the local marketplace, overcoming resistance from corporate neighbors and the community, and uncovering sites that can be successfully retrofitted for this specialty use. But, Riorda believes Class B and C buildings might offer possible solutions as these users don’t typically need high ceilings and large truck courts.
Power requirements for a cannabis growing facility, which can range from 10,000 to 200,000 square feet of space, are substantial and the cost to retrofit a building to support that operation can be exorbitant.
To simulate sunlight, many cannabis growing operations – specifically the grow rooms themselves – are illuminated by 1000-watt grow lights that run for up to 18 hours daily to simulate day and night conditions to stimulate optimum plant growth. That requires a tremendous amount of power, which necessitates larger than typical electrical services, according to David Goodell, Project Manager for James Posey Associates, an engineering firm in Owings Mills. In addition, the interior thermostat is typically set at 75 degrees during the substantial growth period, before slightly tapering the temperature down during the end of the growth cycle to produce a plant optimized for harvesting and processing.
“Achieving the proper humidity level is extremely important and, sometimes, these levels vary room to room to accommodate the various growth cycles of the plants, which also contributes to a more expensive HVAC system,” Goodell explained. “As one can imagine, the security system for these uses is significantly more intensive than the typical warehouse or logistics use and approximates those used at a medical or government facility.
“In many cases this entails the construction of a sally port entrance system which controls individual access to the facility. There is also an extensive security camera network, outdoor fencing and a charcoal filter system that controls the release of odors to the outdoor air. Smelling marijuana drifting throughout the business community or nearby neighborhoods needs to be avoided. McCormick & Co. uses industrial-strength filtration and ventilation systems to eliminate the smell of spices released into the outdoors. Particularly offensive ones, like garlic and onions, are targeted.”
“There is still a stigma attached to the cannabis industry and, in certain markets, there are efforts to overturn legislation that have legalized its production and distribution, so landlords need to weigh all potential risks before executing a lease,” Riorda added.