Marijuana Drives California Real Estate Bubble

It’s hard to forget the real estate crash of 2008, but that institutional memory may be fading in California as marijuana businesses drive up property values across the state.

A report in the San Francisco Chronicle notes that property values are rising in many places thanks to new regulations governing the medical marijuana industry. The bubble is growing in small towns such as Adelanto in the Inland Empire and more populated areas such as San Francisco and Oakland, according to the Chronicle.

In Adelanto, cannabis businesses are outbidding owners of the local complex that manufactures Predator drones. They want to buy the factory and turn it into a large commercial cannabis cultivation site.

The medical marijuana industry hopes to expand dramatically across the Golden State and revitalize struggling communities that have little in the way of a tax base. Whether in small towns or big cities, these companies face stiff competition for real estate.

Property values have surged

And that competition has created a growing bubble. In regions zoned for pot shops, overall property values have climbed from $1.5 million to $4 million. Arid land in the state’s interior deserts is selling for $12 to $14 per square foot – up from 50 to 90 cents. That’s an increase of 14,000 percent in one year.

One Realtor said the bubble in Adelanto “could end up driving out the local representation from General Atomics Aeronautical Systems, the manufacturers of the Predator drone, because their landlords get more money from the marijuana growers.”

In bigger cities such as Oakland, higher real estate prices are becoming a permanent part of the economy. The first licensed cannabis farms are expected to set up shop along the city’s waterfront industrial zone, either in 2016 or in 2017.

Across the bay in San Francisco, permits to run marijuana dispensaries are attached to the property, not the people who run the shops. That has led to several multi-million dollar purchases of shops that are underperforming.

Rental properties drawing lots of money from cultivation

And those properties are drawing massive amounts of money. One landlord in the Financial District is reportedly demanding $1 million each from businesses applying to move into 15 small spaces for cannabis delivery services. Rents currently run up to $15,000 per month.

For now, the bubble is concentrated in just a few parts of California. But new competitions from other areas could slow the bubble, though that isn’t expected to happen anytime soon.

The situation is much less explosive in communities that tightly restrict dispensaries and grow sites. Mendocino County has actually seen property values drop since county leaders enacted radical new limits on cultivation facilities, according to local activists.

Several residents of the county have filed a petition to hold a public referendum on cannabis cultivation regulations. The residents hope to make the county more competitive so property values will rise.

Though real estate bubbles drive up prices and make some people rich, they also tend to burst. Anyone who lived through the last housing crash can attest to the destruction that can wreak. There are no signs the marijuana bubble will burst in the immediate future, but investors will probably take a hit sooner or later.