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Lead to Higher Rents? an Estimation of the Effects of Cultivation Laws on Colorado Industrial Property Values

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Lead to Higher Rents? an Estimation of the Effects of Cultivation Laws on Colorado Industrial Property Values ABSTRACT DOES A LEGAL “HIGH” LEAD TO HIGHER RENTS? AN ESTIMATION OF THE EFFECTS OF CULTIVATION LAWS ON COLORADO INDUSTRIAL PROPERTY VALUES by Jack Edward Fetick This paper analyzes the effect of a change in the legal status of cannabis cultivation on the value of industrial space. An often-cited positive impact of legalization is the increase in tax revenue to the state, yet an increase in demand for warehouse-like spaces may crowd out other industries. An initial estimation analyzes how different characteristics of Colorado counties affect ballot choices. The results indicate areas that supported Barack Obama in 2012 were 26-37 percent more likely to support legalized cannabis. I then estimate the effect of municipalities exercising a “local option” to ban cannabis production on the values of industrial spaces. The natural variation of the local option across the state is used to compare industrial space values across treated areas using a difference-in-differences design. Using data from real estate listing website LoopNet, this paper estimates a slightly higher difference in the value of industrial space in areas with legal cultivation status. DOES A LEGAL “HIGH” LEAD TO HIGHER RENTS? AN ESTIMATION OF THE EFFECTS OF CULTIVATION LAWS ON COLORADO INDUSTRIAL PROPERTY VALUES Thesis Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Master of Arts by Jack Edward Fetick Miami University Oxford, Ohio 2018 Advisor: Dr. Melissa Thomasson Reader: Dr. Analisa Packham Reader: Dr. Austin Smith ©2018 Jack Edward Fetick This thesis titled DOES A LEGAL “HIGH” LEAD TO HIGHER RENTS? AN ESTIMATION OF THE EFFECTS OF CULTIVATION LAWS ON COLORADO INDUSTRIAL PROPERTY VALUES by Jack Edward Fetick has been approved for publication by Farmer School of Business and Department of Economics _______________________________________ Dr. Melissa Thomasson _______________________________________ Dr. Analisa Packham _______________________________________ Dr. Austin Smith Table of Contents I. Introduction 1 II. Literature 2 III. Market Background 3 IV. Data and Estimation 5 a. Limited Dependent Variable Model 5 b. Difference-in-Differences Model 6 V. Results 9 a. Limited Dependent Variable Model 9 b. Difference-in-Differences Model 11 VI. Conclusion 12 VII. Appendix 14 VIII. References 19 iii List of Tables I. Table 1 5 II. Table 2 6 III. Table 3 9 IV. Table 4 10 V. Table 5 11 VI. Table 6 12 VII. Table 7 14 VIII. Table 8 17 IX. Table 9 18 X. Table 10 18 iv List of Figures I. Figure 1 7 II. Figure 2 8 III. Figure 3 14 IV. Figure 4 15 V. Figure 5 15 VI. Figure 6 16 v Dedication To my friends, my family, and my parents whose encouragement supported me through my years at Miami. vi Acknowledgements I wish to thank all of the faculty at Miami that made my experience great, in particular my advisor, Dr. Thomasson, and my music professor, Dr. Schillinger. vi Introduction The changing legality of cannabis in the United States is a national topic of discussion. Initiatives for legalization compare cannabis to alcohol and point towards the failure of alcohol prohibition to prevent negative societal effects. These groups also advocate for the increased tax revenue that a legal market would bring to cash-strapped states. Opponents of legalization argue that it would increase both usage and the negative effects associated with use. There has not been much research into the potential economic effects of creating a completely new industry on a local community. Areas that choose to end cannabis prohibition must be ready to deal with changes to their local economy associated with this change. Cannabis use, like any other drug, can have a great impact on health. Although prohibited for many years, there are many studies that measure the effect of cannabis use on personal health. There have been many areas across the world that have chosen to legalize, allowing for more research activities. Recently, there have been many studies utilizing the variation in laws from various countries as a natural experiment to study cannabis effects. Marie and Zölitz (2015) analyzed a change in cannabis accessibility for college students and found that restricting access positively affects academic performance. While some arguments against legalization cite the aforementioned research as evidence of the positive effects of restricting access on adolescents, other studies have shown that allowing a regulated medical industry has no effect on adolescent consumption. A common argument in recreational legalization efforts compares cannabis to alcohol. In an early twentieth century temperance wave that also led to the banning of cannabis, alcohol was prohibited for thirteen years in the U.S. While overall alcohol consumption fell, numerous negative effects such as organized crime and homicide skyrocketed. Prior research has shown that the decrease in direct effects of alcohol use was offset by the indirect effects of crime and the great increase in government expenditures, particularly on prohibition enforcement. With no legal alcohol, the government could not collect a sin tax to fund this increase in expenditures. These conditions led to the repeal of alcohol prohibition in 1933 and many cannabis activists argue the government is facing the same problem with marijuana prohibition today. Prohibition is ineffective at eliminating drug use and introduces worse negative crime externalities. Although a sin tax may increase the amount of drug consumption compared to outright banning, advocates note that there would be a decrease in related illegal activity. Policymakers following the “harm reduction” approach tend to favor an approach of legalization, education, and taxation. The effects of cannabis prohibition on consumption are similar to alcohol. While the societal impact of drug consumption often receives the most attention, economic outcomes can be harder to study. Drug trade (both legal and illegal) may negatively affect a local economy by discouraging other businesses from locating nearby. But this issue suffers from reverse causality; drug activity might flourish in neighborhoods with few other businesses. Additionally, individual consumption of illicit substances is quite difficult to observe, as are any associated transactions. This is a problem when studying the cannabis industry. Even though legalization may have repealed much of the illegal trade, a black market still persists.1 Still, it is evident that Colorado and other states have been economically impacted by legalization. Once 1 Light, Miles et al. (2016). The Economic Impact of Marijuana Legalization in Colorado. Marijuana Policy Group, Market Intelligence. 1 empty warehouse districts have become centers of cultivation and many local municipalities, in addition to the state itself, have reaped the rewards of taxation.2 Yet, there are negative implications as well. A preliminary study has found evidence that a retail cannabis dispensary can act as a negative externality and decrease residential property values (Thomas and Tian (2017)). Cannabis is still not as prevalent as alcohol, and many firms and households make an effort to avoid the newly legal industry.3 While there is some research on residential effects, there are no studies of legalization on surrounding businesses. Firms may attempt to distance themselves from new marijuana operations. Legalization has created a new industry with a significant economic impact, but unlike some societal effects, it can be difficult to measure. This paper analyzes the characteristics of Colorado counties that may influence support of the cannabis industry. A probit model applied to demographic and ballot data from 2012 found that counties that tend to support Barack Obama and that have a higher concentration of medical marijuana centers and liquor stores are more likely to support legalization than not. I also measure the effect of recreational cannabis legalization on the value of warehouse space in Colorado. Colorado’s cannabis law allows for municipalities to ban different types of marijuana business, which creates both treatment and control counties. Using data from a real estate listing website, a difference-in-differences model is used to estimate effects across treatment groups. I find that areas that allow legal recreational cultivation tend to have lower commercial property values than those that have exercised the local option. The change in the law is also associated with an increase in industrial property values across the entire state. There may be some evidence that areas with legal cultivation have had a higher increase in value than other areas since legalization, but further study is needed. Literature There is not an extensive literature that studies the effects of recreational cannabis legalization. However, there has been some work that has studied the societal effects of medical marijuana and there has been research into the effects of alcohol prohibition, which have some parallels with the legal status of cannabis. One particular working paper uses a similar methodology to this paper to study the effect of retail dispensaries on nearby residential property values. It is important to note that while legal changes are of great interest to researchers, not much can actually be gleaned from these studies. The enormous uncertainty of legal protections and the heterogeneity of medical marijuana laws across jurisdictions means that we do not yet know much about the benefits and harms of marijuana liberalization policies
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