Small businesses compete against MJ growers for space

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For years, the small warehouses scattered throughout Colorado Springs have been of interest to marijuana purveyors — who, during the recession, were the only tenants prepared to pay the price property owners were asking.

“The pot industry was a savior for those landlords,” said Holly Trinidad, co-owner of local commercial real estate firm Hoff & Leigh. “Without those pot guys, they could have been sitting in the dark and potentially lost their buildings.”

Gradually, businesses looking to grow and distribute medical marijuana in Colorado Springs leased long-vacant and low-quality industrial space near the city’s borders and began outfitting them with sophisticated irrigation systems and illuminated them from within to grow premium product.

But marijuana wasn’t the only thing that grew.

As the local economy recovered and the real estate market began to prove bullish, more businesses — homebuilders, small manufacturers and others — found it difficult to find the space that would allow their companies to flourish.

“For small users — around 1,000 to 2,500 square feet — there is just no inventory,” Trinidad said. “That stuff, as soon as it comes online, leases up fast.”

According to a recent report by Colorado Springs-based real estate firm Quantum Commercial Group, the overall vacancy rate for industrial properties in the region fell from 9.7 percent at the end of 2016 to 9.4 percent this year, while availability for smaller warehouses continues to be much lower.

“These vacancy rates, however, do not reflect the strength of the market for industrial spaces 10,000 square feet and less, where we are seeing the vacancy rate dipping slightly below 4 [percent],” according to the report.

Opinions are split on the true cause of the shortage: While some suggest it has everything to do with the Colorado marijuana boom, others blame it on a generally more active local real estate market.

Rene Circ, director and real estate strategist for CoStar Portfolio Strategy, said that he attributes as much as 80 percent of rent growth and low vacancy in the industrial market to the marijuana industry.

“The Denver market has probably benefited slightly more in terms of vacancy compression, but the Colorado Springs market hasn’t been left behind too far,” he said. “It has been a tremendous boom in terms of the amount of space that is being leased and the impact that this industry is having is really at the lower end of the market.”

According to CoStar’s research, rent for larger industrial buildings (25,000 to 100,000 square feet) in Denver has increased an average of 21.35 percent since the beginning of 2014, while rent for the same properties in Colorado Springs has increased an average of 24.8 percent and sits around $7 per square foot.

Circ said the rent growth is a product of market activity from marijuana businesses renting a large percentage of the available product in the years following the recession, when there was very little interest in such spaces.

“The buildings that would be the first vacant during a recession and the last to be absorbed during a recovery have become the darlings, if you will, of this industry,” he said. “That has had a very positive overall impact on the industry … but it’s having some negative impacts as well on the other businesses. … Rents have gotten very high, and if you think about who the other user for these spaces would be, it would be a small business. Those guys are sort of getting priced out of the market.”

But Trinidad doesn’t agree with the notion that marijuana businesses have consumed the local industrial market.

“I don’t think that is accurate at all — I think the problem is that we have no light industrial product,” she said. “I don’t think small businesses are necessarily having a hard time because of the effect of these marijuana businesses. I just think the market is so tight and there isn’t a lot of product coming online.”

She attributes the tightness of the market and rising rents to a lack of available industrial product that can be traced back to the fact that there has been little to no new construction in the light industrial market since the nation’s financial difficulties began in 2008.

“I wouldn’t say it’s because of the pot industry — the pot industry just lucked out because when the market was bad, landlords just took any tenant they could get,” she said. “Most landlords would much prefer to lease to a regular business user than a pot user, just because pot tends to have some negative connotations and it might not be the best use of the space.”

Chuck Murphy, president of Murphy Constructors of Colorado Springs Inc., recently completed construction of a 36,000-square-foot warehouse in the southeast area of the city that is intended to be leased to non-marijuana businesses.

While many landlords five years ago were eager to take on such tenants, Trinidad said that is no longer the case. And as the market has recovered, property owners have regained the luxury of being more discriminating when it comes to lessees.

“Now, you can probably get the same rate from a normal business than a marijuana business,” she said. “There’s not a lot of incentive, if you have the option to lease to one or the other, to lease to the marijuana business. And if you lease to the regular business, there is less wear and tear on your building and less risk from the federal government — it’s just a cleaner deal.”

Trinidad said that whatever market pressure was drummed up by marijuana grows and dispensaries is now subsiding naturally due to local policies restricting recreational operations and limiting medical operations. Rather than pay premiums on rental property in Colorado Springs, many marijuana growers have started moving south for cheaper real estate or expanding into recreational cultivation.

“There were some areas of the local market that used to be really pot-heavy that you’re now seeing be cleaned up and rejuvenated,” she said. “The 500 block of West Colorado Avenue used to be pot-grow central. Now, there’s a mortgage company going in, there’s a distillery looking at going in, there is a high-end automotive sales business — it’s just a really cool little area that used to be all pot. It’s nice to see areas rejuvenated and not have dispensaries on every corner.”

Nonetheless, Colorado Springs remains a market with a short supply of industrial space — a total of around 3 million square feet of vacant space — but there are already developers interested in remedying that.

While rent growth for industrial space in Colorado Springs hasn’t yet reached a level that — to most people — would justify new construction, that isn’t stopping at least one local developer from getting ahead of the curve.

“The rental rates remain slightly below what is required to justify new construction, but due to the large demand for small industrial spaces, we are beginning to see some investors, owners and developers start the process and build smaller industrial facilities,” according to the Quantum report.

Among those investors, owners and developers is Chuck Murphy, who recently completed construction of a 36,000-square-foot warehouse in southeast Colorado Springs designed to meet a growing demand for non-marijuana industrial space.

Murphy’s Class-A warehouse was the only one to be constructed last year and he said he is marketing it to prospective tenants that include companies in medical manufacturing, homebuilding and other industries.

“It might take us a while to get it leased,” said Murphy, the president of Murphy Constructors of Colorado Springs Inc. “But when we do, we’ll have a tenant for a long time.”

Murphy, who owns several other warehouses in the area (I-25 and S. Circle Drive/Lake Avenue), said he plans to soon build an additional 25,000-square-foot warehouse on the same 5-acre tract of land, which El Paso County records indicate he purchased in 2000.