It’s been over two years since Proposition 64, legalizing recreational marijuana, passed in California. And just over a year since this new legislation took effect. A significant shift that initiated a new, and, if predictions are correct, highly lucrative industry.

But two years later, the rules and regulations surrounding the burgeoning cannabis trade remain uncertain. And these murky circumstances have left many in the retail real estate industry scratching their heads, wondering exactly what the future holds for legal cannabis businesses?

To cut through the haze and answer these burning questions, no pun intended, leading commercial real estate news outlet, Bisnow, recently hosted a Future of Cannabis panel discussion in Downtown LA. The assembled panelist offered expert knowledge drawing expertise from many different corners of the cannabis industry.

The panel’s far-reaching discussion covered a lot of ground. But for our purposes, the real questions is: What is the prognosis for retail landlords?

And speaking from that perspective, here are the event’s key takeaways:

Where Does The Law Stand On Cannabis Currently?

“It remains illegal at the Federal level,” notes Troy Dayton of Acrview Group, a Cannabis industry consultancy. But the Obama and Tromp Presidential administrations have both chosen not to pursue marijuana enforcement in legalized states. A trend incoming Attorney General, William Barr, intends to continue.

Dayton also predicts an end to marijuana prohibition in the long term, though he’s not clear on how far down the road this might be. But in the short term, he anticipates legislation, like the recently proposed “States Act,” which, if passed, would prohibit the federal government for enforcing marijuana laws in legalized states.

What are the Biggest Barriers to the Developing Cannabis Trade?

“Regulations are still evolving,” notes Amada Ostrowitz of CannRegs, a cannabis industry consultancy. The most recent “permanent regulations” recently issued by the state are just one more in series of “permanent regulations,” and likely “subject to further revisions before regulations are truly finalized,” Ostrowitz adds.

The real governance, however, is enacted (or not enacted) by local municipalities. “There are over 80 local governments in California,” Ostrowitz says, and each must create their own licensing program.” To further complicate matters: “80% of California’s local municipalities have established some sort of ban against cannabis sales,” Cat Parker, Director of LA’s Cannabis Regulations Department, notes.

What’s the State of Cannabis Sales in the City of Los Angeles?

Unlike many local California municipalities that already had licensing programs in place (to accommodate the medical cannabis trade), Los Angeles only offered limited permits. This forced the city to quickly develop and implement a licensing process, a key factor in the slow of growth of LA’s legal cannabis trade.

That said, Los Angeles has issued 170 cannabis cultivation, distribution, and sales licenses. And the city is currently processing another 760 cannabis business applications.

4 Issues Directly Impacting Cannabis Businesses in the City of Los Angeles

If you own a retail property in the city of Los Angeles and are considering leasing to cannabis tenant, here are four important issues the panelist caution you to keep in mind:

Zoning Concerns – Regulations are still tentative, and thus subject to change. Current “Green Zone” designations may still be revised. This means properties leased to tenants with plans to open a Cannabis business could be foiled if these districts are redrawn.

Fines + Penalties – Leasing to an unlicensed cannabis business is a risky proposition. Property owners can be fined up to $20,000 PER DAY. Additionally, DWP could be called upon to power and water to an offending property. And units may even wind up padlocked, along with a slate of other possible punitive actions. Enforcement has been lax up to this point, but Parker suggests this is going to change very soon.

Community, Law Enforcement + Governmental Opposition – Many powerful local forces still oppose the cannabis industry. And while the cannabis industry is here to say, these disapproving factions are keeping the debate over regulation, particularly proximity to “sensitive neighbors” alive. And may result from further regulatory changes that could negatively impact licensed businesses.

The NIMBYism Factor – Many who support the cannabis industry, in theory, are opposed to a dispensary opening up on their block. And these people are expected to continue to push for further restrictions and expanded regulations, in addition to mounting active protests against cannabis businesses opening in their neighborhood.

Cannabis Business Issues to Consider Now and in the Future

Regulation Is Key to the Success of the Cannabis Industry – “Oregon made a HUGE mistake! The state issued 64,000 cannabis business licenses. Now, however, only a third of those businesses are still active,” notes Paul Smithers, President of Innovation Industrial Properties.

As with any market, cannabis is subject to the law of supply and demand. Too many operators equal oversupply. And oversupply drives prices down.

Oversupply then paired with leasing rate premiums and high taxation is guaranteed to shutter many fledgling cannabis businesses.

As such, regulation, in both limiting licenses and policing unlicensed operators is key to the long-term success of the cannabis industry.

Current Taxation is Likely to Change – And continued hikes could be VERY bad for business.

“Many municipalities are looking to the cannabis industry as CASH COW,” PLUS Products’ Jennifer Tung says. But countless operating are already crying afoul of heavy taxation. “Licensed cannabis business, subject to high taxes, often can’t compete with black market sellers that pay zero taxes,” Tung adds.

There is an additional concern that as more businesses enter the market, and competition increases, prices will fall. And current tax rates, or future tax hikes, are bound to drive many cannabis operations out of business.

Lease Rate Premiums Are Likely to Fall – “Current cannabis lease rates are trending at 4x to 5x above market rates,” says Arcview Group’s Troy Dayton. But again, as competition rises, premiums are destined to fall. And as more operators enter the market, and supply expands “Lease rates will fall to around 2x above market rates, at best,” Dayton adds.

“Long term leases at current premiums may force operators to renegotiation or drive them out of business,” notes Ostrowitz. Highlighting that rising competition is poised to impact current operators.

Aquent Insurance is Crucial – “Due to the federal prohibition on marijuana sales, cannabis businesses can’t have regular bank accounts. And their business is largely cash-based,” Notes David Paletz of Novus Underwriters, an insurance firm specializing in cannabis businesses. Paletz adds: “this requires additional security precautions and special accommodations to store both the ‘product’ and cash onsite. Underwriters are well of aware of this, and require additional property, liability, and workman’s comp insurance for properties hosting cannabis businesses and the businesses themselves.”

How Can CBM Help?

Over the past several decades since medical marijuana was legalized in California, we’ve completed hundreds of cannabis business leases. In addition, we currently manage countless properties home to hundreds of cannabis business tenants.

We understand the unique requirements of this tenant type and have effectively navigated the cannabis industry with minimal discord.

Do you need assistance leasing to cannabis tenants? Or property management services for a shopping center leased to a cannabis tenant? CBM can help!

Visit our services page for additional information: cbm1.com/servcies


715 E. Holt Avenue, Pomona, CA

Centers Business Management (CBM) Valley Division Director, Dave O’Connell, and leasing agent, Eric Kalfa, recently completed a leasing transaction representing the landlord and tenant, Good Quality Appliances, a local appliance company, on a 2,000 SQFT retail building. The property is on busy Holt Avenue, just east of the intersection at San Antonio Avenue in prime Pomona. Adjacent tenants on the busy intersection include Rite Aid drugstore, 7-Eleven anchored strip center, and Valero Gas Station.


By Geoff Grossman
CBM Retail Specialist

Have you looked at the Southern California landscape lately? The entire region has been…

Overrun with Mixed-Use Developments!

SoCal is in the midst of a full-blown transformation. It’s happening on countless main drags. And even on many lesser traveled thoroughfares. Streets, avenues, and boulevards are bidding farewell to the low-rise multi-family dwellings and street retail shop space that once dominated this concrete jungle.

And rising up in their place? A bevy of mid-rise mixed-use developments. Multi-purpose properties featuring street retail units situated underneath apartment residences are being constructed as quickly as over-eager developers can possibly manage to erect them.

Practically speaking, the move toward mixed-use development totally makes sense…

What’s the one thing you can’t make any more of? Land. And Southern California is clearly fresh out of this non-renewable resource.

Further exacerbating this shortfall, the region is facing a catastrophic housing shortage. Which is destined to grow far, far worse before we see any indication of improvement. And this is a clear guarantee, as the Southland’s surging population growth shows no signs of waning.

In turn, the cost of the dirt alone, the real value in SoCal real property, has risen to astronomical heights. And that’s all before you factor in exorbitant design, engineering, entitlement, and construction costs.

So, how do you address land scarcity, prohibitive development costs, and strong housing demand in the face of a huge shortage?

The only option that remains: Verticality. Go UP! Hence, the current mixed-use development explosion.

The Problem – From a Retail Standpoint – With the Current Mixed-Use Development Trend

The growing mixed-use growing trend may be a practical, savvy approach to land-use in the face of challenging circumstances. The execution on the retail side of the equation, however, is falling severely short.

Scores of new mixed-use projects have risen with retail units that, in their current state, are essentially un-leasable. While other buildings have seen promising, highly sought-after tenants come and go at an astonishing speed. And these unexpected tenant departures that have left high profile vacancies in prominent locations in their wake. All because the units proved impractical for retail purposes.

Key Factors Negatively Impacting Retail Units in Mixed-Use Developments

Projects Helmed by Developers With Little to No Retail Construction Experience

The majority of recent and currently in development mixed-use projects are being handled by residential-focused developers. In other words, developers experienced in building apartments and condominiums. Not retail projects.

And it makes sense, as the majority of these projects are dedicated to residential use. But this residential focus has largely excluded any concern for the retail portion of these developments.

Architectural Design Flaws Are Limiting or Excluding Countless Retail Uses

Multi-family residential developers are fixated on their “cost per door.” As a result, mixed-use developers are intent upon maximizing residential space, while in turn minimizing overall construction costs.

This leads to architectural designs that incorporate retail space almost as an afterthought. A move which yields space that’s unsuitable for any potential tenants currently active in the marketplace.

And therefore, renders the retail portion of these new developments effectively un-leasable.

Drilling down into the problem, here are the five major architectural issues inhibiting the absorption of retail units in mixed-use developments…

Descending Rooflines

Both to maximize residential unit space and serve aesthetic design considerations, mixed-use building rooflines are descending far too close to street level. This creates very short storefronts, which seriously limits visibility for ground floor retail units, heavily obscuring shops from both auto and foot traffic.

Narrow Storefronts

In the majority of mixed-used development, frontage is limited, while depth is plentiful. Thus, to accommodate more retail units (and accommodating as many residential units as possible, which is every residential developer’s goal), most mixed-use shop is exceptionally narrow. This reduces store frontage, which, similarly to descending rooflines, significantly limits visibility to both auto and foot traffic.

Oddly + Oversized Shaped Units

As noted above, mixed-use developments face some unique spatial challenges. To maximize the use of available space, developers are inclined to make units deep and narrow.

Also, as I mentioned, narrow units, and the resulting limited store frontage are a major drawback for most retailers seeking to maximize their storefront display opportunities.

Additionally, deep units tend to yield a good deal of square footage, often in excess of 2,000 SQFT. Meanwhile, most tenants ideally suited to typical mixed-use developments – hair + nail salons, medi-spas, private fitness studios, and quick-serve restaurants – are seeking anywhere from less than 1,000 SQFT up to a maximum of 1,400 SQFT.

As a result, mixed-used developments are struggling to find tenants due to their impractical unit footprint. Or developments wind up with tenants that are forced to over-pay for excess space they simply don’t need. And these tenants often don’t stick because their profit margins don’t justify their rent.

Lack of Forethought or Planning to Accommodate Restaurants + Food-Use Tenants

Restaurant and food-service tenants have very specific mechanical requirements. Venting for cooktops, ovens and other food heating equipment is a MUST. And grease-receptors to handle the by-products of cooking and other food preparation are also a necessity.

Additionally, proper venting must (a) be constructed to code, (b) have a practical pathway to a building’s exterior, and c) not adversely impact the residential units.

Also, a portion of a grease-receptor’s apparatus must be buried underground in a specific spot relative to the unit the receptor serves and must readily accessible.

Suffice it to say, a good deal of pre-planning is required at the architectural design phase in order to properly orchestrated the infrastructure necessary to accommodate restaurant tenant.

Meanwhile, many new mixed-use developments lack all accommodations for cooking-related venting or grease receptors. And as such, these developments have completely excluded any food-use tenants that cook food onsite.

Lack of Planning for Parking Requirements

Municipalities have minimum parking requirements for retail properties based on use-type. Food-use tenants, for example, generally require more parking, as restaurant patrons tend to linger longer than customers of other retail outlets.

Mixed-use developments already include parking to accommodate residents. But developers often fail to account for the parking necessary to accommodate retail customers.

Additionally, typical parking requirements should be eased in mixed-used developments these buildings already include onsite parking. Yet many developers fail to seek preliminary waivers and other parking concessions from municipalities in the planning and construction phase.

In either case, many tenants are denied operator permits because available parking does not meet the requirements for their particular use-type.

The Solution?

Based on the assessment above, the deck is heavily stacked against retail inclusion in a great many existing mixed-use developments.

Is there a way out of this mess?

The good news is: Yes! But it will require additional effort, forethought, and further capital investments on the part of mixed-use developers.

Planning For Retail in the Project Design Phase

Speaking in terms of new projects, developments should be designed with the necessary accommodations for retail units in mind from the very beginning. Proper roof lines, adequate store frontage, functional unit sizes and configurations, patio space, considerations for potential use-types (restaurants, smaller square footage users, etc…), and adequate parking allotments for retail should all be baked into original project designs.

Renovations

For existing projects, any possible renovations should be strongly considered. Adjustments to roof lines and storefronts, demising interiors to create more functional space, adding exterior patio space, excavation to install grease traps, and additional building construction to connect venting for ovens and stoves.

Alternative Uses

For developments in which renovations are impossible, developers most definitely must think outside the box to fill their retail vacancies.

This means considering tenants atypical for most mixed-use develops.
Options include:

== > CrossFit gyms, yoga schools, and other specialized personal training

== > Veterinary clinics, animal hospitals, and pet stores

== > Daycare facilities, early learning centers, private academies, and tutoring service providers

Additionally, tenant rep brokers also need to think outside the box. Brokers need to look beyond shoehorning in “typical” mixed-used tenants, the majority of which are a no-go in many existing mixed-used develops. And instead, seek alternative users that are more capable of using spaces as-is, and more likely to succeed financially in the long term.

Rent Reductions

And if all else fails? Many developers are going to have to bite the bullet and make financial concessions. This manifests as either offering rent-deductions to existing tenants or reduced rental rates on current vacancies to make these spaces more feasible for potential tenants.

The Bottom Line…

Mixed-use develops make undeniable practical sense. Moreover, such developments represent a huge economic potential for savvy investors.

But currently, this real estate segment is in an enormous state of disarray.

And unless developers take decisive action, and do so quickly, Southern California is going to wind up with a colossal glut of very expensive vacancies, and zero willing takers anywhere in site.

How Can CBM Help?

We have a collective 80 years of shopping center development, sales, leasing, and management experience under our belts. During our 30+ year tenure in the industry, we’ve leased and managed thousands and thousands of retail properties for hundreds of landlords across Southern California. And that includes more than our share of mixed-use developments.

With this sort of track record, it’s more than fair to say: We’re the retail EXPERTS!

But there’s another factor that figures into this equation. CBM was found by La Mancha Development, formerly one of Southern California’s most successful strip center development firms. La

Mancha designed, built, and sold thousands of strip centers throughout the Southern California market. Just about every 7-Eleven anchored strip center you see between Santa Barbara and San Diego was built by La Mancha.

That’s where our “80 years of collective shopping center development, sales, leasing, and management” expertise is drawn from.

So, not only do we know the retail leasing market. We know the ins and outs of what yields a successful retail development, too.

Before You Start Your Next Mixed-Use Development…

Before your team even settles in to discuss potential project designs, come to us first. We’ll present a practical perspective on what works for retail in a mixed-use property, including:

== > An overview of ideal tenants for your project

== > Functional design elements necessary to adequately accommodate those tenants

== > Required infrastructure for restaurants and other specialty tenants

== > Parking subdivisions to create dedicated retail parking in either subterranean lots, adjacent to resident parking, or separate surface retail-only parking

== > How to create a “parking plan” (that underscores reduced parking needs due to ride-share services like Uber + Lyft, rental scooters like Bird + Lime, and increased public transit use thanks to the ongoing Metrorail expansion) and approach municipalities in advance and successfully negotiate zoning modifications to ensure incoming tenants will secure use permits and meet municipal imposed parking requirements

== > And much, much more!

CBM is Your Best Resource to Develop a Successful Mixed-Use Project

Find out more about how our leasing services can benefit your next mixed-use development at: cbm1.com/services

About the Author

Geoff Grossman is retail leasing + sales agent specializing in landlord representation throughout Southern California. Mr. Grossman launched his commercial real estate career in 1999 when he joined CBM as a leasing agent. Since that time, Geoff has leased + sold thousands of retail properties, and participates in an average of 100 leasing + sales transactions annually.


It’s no secret retail is in the midst of a full-blown sea change…

The industry, as we know, is facing a dying paradigm. The internet has provided a faster, more efficient, and far cheaper outlet for a huge swath of retail sales. Thus, anything and everything that can be sold online has relocated from brick and mortar stores to snazzy new digs in cyberspace.

So, where does this shift leave shopping center landlords?

With the less than enviable task of repositioning and repurposing their properties.

Storm Properties, a partnership with retail real estate holdings in the Inland Empire, is a landlord currently facing this difficult challenge.

Specifically, Storm Properties has struggled to fill space formerly occupied by traditional retail tenants selling durable goods at their Glendora Marketplace shopping center.

The regional center, at Lone Hill Avenue and Gladstone Street in the city of Glendora, is anchored by The Home Depot, Sam’s Club, Kohl’s, Best Buy, AMC Theaters, and other national retailers. Yet despite the presence of these sterling co-tenants, Storm Properties has labored long to fill vacant pad space adjacent to the main buildings.

But with the signing of three new leases — ushering in Blaze Pizza, Fatburger and Saj Bakery — the center is 100% leased!

And Storm Properties attributes this success directly to the efforts of CBM leasing agent, Jason Ehrenpreis. Here’s a quote By Storm Properties President, Jay Ahluwalia, from a recent Associated Press (AP) article praising Mr. Ehrenpreis’ work:

“We’re excited to be 100% leased. In the last year, we have made significant capital improvements to the center, resulting in the tremendous amount of interest received from prospective tenants,” said Jay Ahluwalia, President of Storm Properties. “We want to thank Jason Ehrenpreis of Centers Business Management for acting as the leasing broker for Storm Properties,” Ahluwalia added

Mr. Ehrenpreis posted a banner year in 2018, achieving a new personal best in completed transaction volume. And he was recently part of the Annual ACRE SoCal Real Estate Forecast Panel.

Read the full AP article here…

 


Did you happen to browse last week’s edition of The Los Angeles Business Journal?

Is so, you may have noticed CBM was ranked Los Angeles County’s #1 Retail Property Management Firm in The Los Angeles Business Journal’s annual Book of Lists!

2018 proved a banner year! And as a result, we registered 8.8 million SQFT of retail shopping center space under management in Los Angles County. And 14 million SQFT total under management firm-wide.

With this exceptionally strong showing, we beat out some stiff competition — including CBRE, JLL, NewMark Merrill, Coreland Companies + more! — in the increasingly aggressive retail property management field to claim the top spot.

For more information CBM’s retail property management services, visit our services page at: cbm1.com/services.


MOVIN’ ON UP!

CBM leasing agent, David Guardado, celebrates moving into posh new digs – his very own private office – in our Encino location. Flanked by Dave O’Connell, CBM Valley Division Director + Rick Rivera, CBM President, David is clearly settling in nicely.

David joined CBM in 2011 and has since become one of our top-producing agents. Thus, it only seems fitting David should graduate from a cubicle to a private office :—)

Thanks for your continued exemplary efforts, David. And enjoy the new space!