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New from CBRE is a follow-up report to our Q2 2015 report on Denver’s marijuana-growing industry and its impact on the local industrial market. With more states since having legalized (or taken steps toward legalizing) recreational marijuana, some are looking to Denver to gauge how the industry might affect their local fundamentals.

As of Q4 2016, marijuana growers occupied 4.2 million sq. ft. of industrial space in metro Denver—an expansion of 14% over the figure we published in Q2 2015. All of that growth has not been evenly distributed however; local regulations have played a major role in the timing and magnitude of the industry’s local absorption of space.

In May 2016, Denver put a cap on the number of cultivation locations. Growers can therefore expand within facilities for which they are already licensed, but can only occupy new premises if they transfer an existing license, which can be difficult. Denver claims most of the metro area’s marijuana footprint, so we can estimate that most of the industry’s net take-up since Q2 2015 occurred prior to Q3 2016. Since then, the market has been stabilizing and consolidating.

Over 2014-2016, the average effective lease rate for a sample of 25 marijuana grow houses was $14.19 per sq. ft. NNN—two to three times higher than the average warehouse lease rates in Denver’s four top cultivation submarkets. Sales of marijuana-occupied properties show a 25% price premium over Class B and C warehouses in general. With licenses in short supply and suitable industrial space costly, consolidation has been the theme for some time. Although some well-known operators were able to build large cultivation facilities before the moratorium took effect, for most, acquisition has been the only means to increase market share and achieve economies of scale.

Growers have also become more efficient producers, pressed by dropping wholesale prices as the industry’s output has grown. Between Q2 2015 and Q4 2016, the average number of plants cultivated per grow space increased by 28%.

As marijuana cultivation moves into other metros, local supply and demand considerations will apply as they do for other industries. Target submarkets and their availability rates will play a part in how this entry plays out, as will zoning requirements. But the housing of marijuana cultivation faces some unique considerations as well, including a perception among landlords of greater forfeiture risk, possible local regulations on types of grow sites, tracking and taxation, and possible changes in national policy, such as whether or not interstate transport will become allowable. Collectively, these dynamics provide a roadmap for identifying opportunities in the market—regardless of whether one is approaching the industry as an occupier, landlord or investor-owner.