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In the early 2010s, my dad and I would go to industrial real estate conferences in Denver, Colorado. The turnout was generally desolate and the few faces that actually came stayed the same year after year. The product type was bland and the conversations generally remained the same. At the time, I thought nothing of it. At the time, I didn’t realize I was sitting among a group of revolutionary investors of our time.
Today we sit in the same conferences, but the room is no longer desolate. It’s packed. Brokers in designer suits fill the room and you’re lucky if you get a seat. The secret is out.
Leasing industrial commercial real estate has been an enlightening journey since the economic downfall of 2008. The late 2000s were a difficult time for Americans, but little did we know everything was about to change. Simultaneously, e-commerce was on the rise. Mom and pop websites like eBay and Amazon started to infiltrate our culture, providing a value to society that was unimaginable by most. In conjunction with e-commerce, emerging industries like computer systems and medicinal cannabis only propelled the change forward expeditiously.
With such drastic changes in the landscape of our economy, the real estate industry could not conceptualize the changes that it was about to see.
Cue January 1, 2014, as Colorado’s Amendment 64 was put into play, unleashing a soon-to-be billion-dollar industry on Colorado. The recreational legalization of cannabis was a basic lesson in economics in and of itself. Demand for warehouse space skyrocketed, supply of warehouse space was low and prices reflected as such. Vacancy dropped to historic lows and rental rates soared.
Industrial facilities, once treated like the stepchild of commercial real estate, started to garner respect. But it wasn’t just the cannabis industry to thank for the massive shift in the industrial real estate industry. Brick-and-mortar stores sought refuge from high retail storefront prices behind websites and warehouses and the results were a success. Difficult retail margins were soon relieved with its newfound use of real estate. Shortly after, we would begin to see the emergence of ghost kitchens, new restaurant kitchen facilities that stepped out of the retail space into warehouses to exclusively serve delivery to customers.
Between the years 2014 and 2018, those who’d already invested in industrial real estate in the states that had legalized cannabis felt the impact tremendously. Space that we had once leased for $4 per square foot was now leasing for $9, and leasing up quickly. At the time, we called it the “green rush” and some investors leaned into it while others stayed far away. I could write a book about the medical marijuana tenants our company housed and the struggles they encountered. That will be for another time.
The year is now 2020 and things have quieted down quite a bit. The legalization of medicinal and recreational cannabis in additional states has spread the demand for warehouse space nationwide. The green rush is over, and as a general consensus, we are OK with it. I would be lying to you if I told you rental rates and vacancies haven’t adjusted in conjunction with the change. Businesses are taking longer to lease space, and we are seeing rental rates adjusting from the green rush surge.
The change in rental demand has not scared off the new industrial investors. Demand to buy industrial real estate remains as high as ever as investors take their stab at this once dismissed sect of real estate.
The takeaway is clear: Take calculated risks. Educate yourself on your investment category. Deploy arbitrage to make the most of your dollar. Sometimes you will win and sometimes you will lose. In the case of industrial owners before the secret was out, consider that a winning hand.