Marijuana Producers Gobble Up Warehouse Space in Denver Area

Businesses struggle to find space as marijuana industry expands in Colorado
Marijuana plants grow underneath water-cooled lights in the Pink House Blooms grow house in Denver, Colo. ENLARGE
Marijuana plants grow underneath water-cooled lights in the Pink House Blooms grow house in Denver, Colo. PHOTO: BENJAMIN RASMUSSEN FOR THE WALL STREET JOURNAL
By ROBBIE WHELAN and PAUL PAGE
Aug. 25, 2015 5:30 a.m. ET
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Steve Badgley has been hunting for a larger warehouse in the Denver area for more than a year. But his construction-supply business keeps getting squeezed out by a new entrant into the real-estate market: the marijuana industry.

Since voters in Colorado and Washington legalized recreational use of the drug in 2012, growers and distributors have gobbled up most of the available warehouse space in the Denver area, a major logistics hub for companies moving goods between the Midwest and the West Coast.

The marijuana industry is poised to expand quickly. Legal sales in Colorado of medical and recreational cannabis totaled about $700 million in 2014, the first full year for which statistics are available, according to a Wall Street Journal analysis of Colorado tax data. The number of active licenses to grow the plant for retail consumption shot up to 397 from 204, according to Colorado’s Marijuana Enforcement Division.

Customers line up for "Green Friday" deals at the Grass Station marijuana shop in Denver, Colo., on Nov. 28, 2014. ENLARGE
Customers line up for "Green Friday" deals at the Grass Station marijuana shop in Denver, Colo., on Nov. 28, 2014. PHOTO: RICK WILKING/REUTERS
The problem for Denver business owners: marijuana producers require lots of space to grow, package and store their products. In all, growers and distributors took up a third of all the warehouse space leased in Colorado over the past 18 months, according to Cresa Partners, a brokerage.

The warehouse crunch means many small businesses are struggling to find the space they need. Mr. Badgley, chief executive of Colorado Specialties Corp., a building-supply business, said his 7,500-square-foot warehouse and showroom is so crammed with bathroom fixtures and other materials that it is difficult to navigate. He would like to move to a building with triple the space, but can’t find anything affordable.

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“It’s all just getting snatched up by these marijuana people,” he said.

‘It seems like every warehouse from 8,000 to 20,000 square feet is being turned into an indoor marijuana farm.’
—Tom Glaspern, managing director in Denver for SEKO Logistics
Denver is the key logistics hub between Kansas City and southern California, especially for large industrial supply chains. A crunch in warehouse space means higher costs for logistics and transportation providers. Rents in the Colorado warehouse market rose 10% last year, to $5 a square foot, according to CBRE Inc., a real-estate services firm. The cost to buy warehouse space has doubled to $80 a square foot since the beginning of last year.

“It seems like every warehouse from 8,000 to 20,000 square feet is being turned into an indoor marijuana farm,” said Tom Glaspern, managing director in Denver for SEKO Logistics, a logistics-services provider. “We had opportunities [with customers] last year that we just had to turn down because we didn’t have the space.”

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Twenty-two states and the District of Columbia have enacted laws to legalize medical marijuana, including Colorado in 2000, but investment in the industry in Colorado picked up only after recreational use was legalized there. Denver’s warehouse squeeze could play out in other cities as the business grows. Alaska and Oregon have also legalized recreational marijuana.

Mr. Glaspern says the squeeze is especially tight in Denver because Colorado has relatively little industrial space outside the area. What’s more, because Colorado doesn’t border a state that has legalized recreational marijuana use, there isn’t much transport in or out—it is grown, processed and consumed right there.

The effects of the marijuana referendum in November 2012 began to hit the state’s commercial real-estate market roughly a year later, after federal law-enforcement officials said they would leave most regulation to the state. Investors quickly began pouring money into production facilities and other “cannabusiness” assets in Colorado.

Most growers use warehouse space as a combination indoor farm, packaging facility, storage space and distribution center. Employees clip buds from plants, cure them and ready them for shipment.

“It’s a factory that grows plants,” says Tim Cullen, owner of Colorado Harvest Co., a retailer that produced 3,600 pounds of pot last year and expects to produce 10,000 pounds this year. “It does not look like your friend’s basement in college.”

Colorado Harvest owns 55,000 square feet of warehouse space to supply its five retail locations and is looking to lease 12,000 square feet more. Last year, after seeing warehouse rental prices increase, Mr. Cullen decided to build his own 35,000-square-foot facility in West Denver.

Growers are most interested in warehouses smaller than 80,000 square feet. Such spaces typically are used by modest manufacturing businesses. Converting them into cannabis-growing facilities often requires hundreds of thousands of dollars in upgrades to lighting, electrical and ventilation systems.

Some brokers and logistics professionals worry that once converted into production facilities, warehouses will be difficult to relet because they have become so specialized.

Mark Bowen, vice president in the Denver office of DCT Industrial Trust Inc., a real-estate investment trust that owns warehouses, said demand from marijuana growers has driven up the cost of warehouse space for users from the natural gas and tech industries by 60% or more, and increased lease renewal rates by 25% for DCT’s clients worried that if they don’t re-sign they will lose their space to the pot industry.

“We’re happy about it,” Mr. Bowen said. Marijuana growers “are taking some of the space…that startups would maybe go to, and some of those businesses are having to come to buildings like ours.”

Write to Robbie Whelan at robbie.whelan@wsj.com and Paul Page at paul.page@wsj.com