The State of Washington is currently in the process of merging all medical and recreational marijuana businesses into a single regulated market. As such, the only way to legally sell marijuana in King County (which includes the cities of Seattle and Bellevue) is with a state-issued license. The state may not issue licenses to any retail marijuana producer, processor, or retailer within 1,000 feet of an elementary or secondary school, playground, recreation center or facility, child care center, public park, public transit center, library, or game arcade that allows minors to enter.
There is currently a moratorium in effect for collective gardens in unincorporated King County.
In December 2013, the King County Council established the following restrictions on all retail marijuana businesses in the incorporate areas of the county:
Production
In Seattle, cultivation facilities of up to 10,000 square feet are allowed in industrial zones. Up to 20,000 square feet is permitted in area IG2. Retail cultivation is prohibited in residential, historic and small neighborhood commercial areas of the city.
The production, processing, selling, or delivery of marijuana, marijuana-infused products, or useable marijuana that involves more than 45 marijuana plants, 72 ounces of useable marijuana, or an amount of marijuana-infused product that could reasonably be produced with 72 ounces of useable marijuana, may not be conducted in association with any business establishments or dwelling units in Seattle located in any of the following areas of the city:
All recreational marijuana transactions are subject to a 37% excise tax paid to the Washington State Liquor Control Board, in addition to state and local sales taxes. The combined sales tax in Bellevue and unincorporated King County is currently 9.5% and in Seattle it is 9.6%. All businesses with over $100,000 in gross revenue are also subject to a business and occupation (B&O) tax of 0.215%.
County and City officials in King County are strongly committed to the merging of medical marijuana into the state-regulated retail cannabis market and have recently put pressure on local business owners in order to complete the process by 2016. In July 2015, King County Prosecuting Attorney Dan Satterberg and County Sheriff John Urquhart announced a countywide effort to shut down unlicensed medical marijuana businesses operating in unincorporated King County. As of August 2016, the majority of unlicensed dispensaries in the Seattle metropolitan area have either closed their doors or successfully obtained a recreational license.
In Bellevue, the City Council voted 5-2 in May 2014 to reject a proposed moratorium on retail marijuana stores. Councilors said they intended to respect the decision of Bellevue voters, who approved legalizing in 2012 with 58% of the vote. As of August 2016, there were 6 recreational dispensaries operating in Bellevue.
As one of the largest legal marijuana markets in the state, current projections indicate the Seattle/Bellevue area will experience steady growth over the next few years. Although the market exhibited rapid growth in the first few months following legalization, recreational sales leveled off quickly.
The value of the Seattle/Bellevue market is expected to grow from $296 million in 2016 to $591 million in 2020, a growth rate of 99% and a Compound Annual Growth Rate (CAGR) of 19%.
While current data suggests steady growth for the Seattle/Bellevue market, recent regulatory developments make it difficult to quantify exactly how the market will move in the near future. Under Washington State Senate Bill 5052, the state’s Liquor and Cannabis Control Board has overseen the consolidation of medical market into the recreational market. Overall, the consolidation is not expected to have any significant negative effects on overall market growth.
One of the biggest stories impacting the Seattle/Bellevue market for 2016 is the passage of Senate Bill 5052, which seeks to consolidate the largely unregulated medical marijuana market into the newly established recreational marijuana market. The bill, introduced in April, makes a number of important changes such as requiring medical dispensaries to apply for a retail license or face closure (existing recreational stores will not be impacted). As of August 2016, there was to be no limit on the number of business licenses granted by the state. Among other regulatory changes, retail marijuana stores will be required to carry various types of medical marijuana products that may only be sold to qualified patients. The senate bill has already shut down the majority of medical dispensaries and the market is expected to be fully unified in late 2016. Fortunately, many medical dispensaries have been able to obtain new recreational licenses, meaning the negative effect on market growth as a whole has been minimal.
As mentioned previously, the most significant challenge currently facing Seattle cannabis businesses has been the regulatory transition introduced by Senate Bill 5052, which resulted in the closing of a significant number of medical marijuana dispensaries throughout the state. The Liquor and Cannabis Control Board has indicated the new licensing system will be merit based, favoring dispensaries that have regularly paid taxes and do not have a history of regulatory infractions. It is believed it will be very difficult for medical dispensaries without clean records to obtain licenses under the new system. Nevertheless, many medical dispensaries have applied for and received new dispensary licenses. This, in addition to the removal of any limit of the number of licensed businesses in the market, ensures the long-term effect on the market will be minimal.
Washington’s tax structure will continue to be a substantial burden for dispensaries in Seattle and Bellevue. Previously, marijuana sold in Washington was taxed 25% at each tier of production (cultivation, processing, and retail) making Washington’s legal marijuana the most expensive in the nation. Likewise, federal classification of marijuana as an illegal substance denies cannabis businesses access to financial services and prevents them from making business-related tax deductions.
Under Senate Bill 5052, the three-tiered tax system has been replaced with a flat 37% tax levied on retail marijuana sales. While this represents a large decrease in the tax burden for Washington’s marijuana industry, a rate of 37% is still higher than the planned recreational tax rate in Oregon (where authorities plan to set the tax rate for recreational marijuana at closer to 20%). High levels of taxation will keep marijuana prices in Seattle relatively expensive and weaken the area’s competitiveness against alternative destinations for marijuana tourism in states like Colorado and eventually Oregon. Thus the state’s tax system poses an obstacle to market growth and business development.
Marijuana cultivation in King County is concentrated in two main areas: Seattle, which consists of mainly indoor cultivation, and Vashon, a rural island off the coast of Seattle that is home to a number of mid-size, outdoor marijuana farms.
Marijuana cultivation licenses in Washington are licensed under a three-tier system, based on the area of dedicated plant canopy. Tier 1 licenses allow for up to 2,000 square feet, tier 2 licenses allow between 2,000 and 10,000 square feet, and tier 3 licenses allow between 10,000 and 30,000 square feet. There are currently two tier 3 producers operating in Seattle: Sky High Gardens and New Leaf Enterprises, both of which are indoor cultivation facilities.
Sky High Gardens produces over 20 different strains of marijuana in a 30,000 square foot indoor growth facility, and offers tours of its grow operations to the public through marijuana-focused tour company Kush Tours. New Leaf Enterprises, the parent company of concentrates manufacturer Dama Cannabis Products (the leading cultivator by sales volume in 2016) maintains a large indoor growth facility in Seattle where it grows cannabis for use in retail concentrates. New Leaf also grows cannabis high in CBD content for use in its Leaf of Hope Program, which provides CBD concentrates at a low cost to families of children suffering from epilepsy and other illnesses treatable by medical marijuana.
Following legalization in 2014, Vashon Island, with its ideal climate and abundant farmland, became a center of recreational marijuana cultivation. Currently, there are a significant number of tier 1 and tier 2 marijuana cultivators on the island. Most are members of the Vashon Island Marijuana Entrepreneurs Alliance, which seeks to make the island into a haven for small-scale, boutique marijuana farming. The only risk to growing on the island is shipping marijuana to the mainland, as maritime and air freight regulation falls under the domain of the federal government which still considers marijuana an illegal substance.
There are numerous large-scale processing facilities present in Seattle. Aforementioned New Leaf Enterprises produces concentrates for its Damas Cannabis Products line in its Seattle facilities. Circanna is another large-scale processor that manufactures a variety of infused products under the Mary’s Medicinals, Nectar Craft, and Oakor brands.
Many edibles manufacturers are also present in the area such as Evergreen Herbal which manufactures the 420 Bar for the Washington market, Botanica Seattle which produces the Spot’s line of infused chocolates, and Winterlife, maker of vegan-friendly edibles.
Washington has recently completed the process of overhauling its marijuana regulations and incorporating the state’s medical dispensaries into its newly established licensed system for marijuana retailers. Although the number of dispensaries declined somewhat in 2015 as Seattle city officials forced the closure of several marijuana dispensaries, the removal of any limit on the number of dispensary licenses to be issued statewide has fostered a recovery in the number of operational storefronts in 2016.
As of August 2016, there were 103 licensed dispensaries operational in King County, a significant increase from just 28 in 2014.
There are a handful of commercial testing facilities in and around the Seattle metropolitan area that meet the region’s testing needs. Analytical 360 is one of the Seattle area’s oldest and most prominent testing labs, and currently the only one located within Seattle city proper. Steep Hill, the marijuana testing lab chain associated with Oakland’s Harborside Health Center, operates a location in nearby Tukwila. Other regional testing labs include Phytalab in Kirkland and Herbal Analytics in Woodinville.
King County makes up two million of the state´s seven million people. Slightly more of King´s population is between the ages of 25 and 50 than Washington´s, while the state has 2% more of its population 65 or older and 0.6% more of its population ages 20 to 24 than does King County.
King´s ethnic composition is likewise similar to Washington´s in that the majority of each is white (61% and 71%, respectively). Both King and Washington also have sizeable Hispanic populations (with 9% and 12%, respectively) and both have relatively large enclaves of Asian residents, though there are substantially more in King County (18% versus Washington´s 9%).
King County´s income levels are considerably higher than Washington´s as well as the highest in the region. Its median income, at $75,660, is very high for the region and over $20,000 above that of the state. King´s mean income is over $100,000 and greater than Washington´s by over $34,000.
Education levels in King County are also much higher than in Washington state, with nearly 50% of residents holding a Bachelor´s Degree or higher in King, and only 25% in Washington.
Finally, fitness levels in King County are particularly high, with Seattle ranking number seven nationwide in the 2014 Fit City Index, which considers personal health indicators as well as community and environmental indicators.
Statewide, 23.4% of residents aged 18-25 have used marijuana in the past month, versus only 8.1% of those over 25 (2014). King County, the region, and Washington State have about the same proportion of their populations (6.3-6.9%) between the ages of 20 and 24, where recreational marijuana´s legal use and the highest demand coincide. King County´s population is slightly younger than that of Washington with a higher proportion of residents in the 25-50 range. Because younger demographics tend to use with more frequency in the state, King residents may have a higher demand for marijuana than other state residents.
According to nationwide data from 2013, the race least likely to use marijuana is Asians, and the Pew Research Center´s data from 2015, Hispanic people also tend to be conservative when it comes to marijuana, with only 40% supporting its legality. Even though King County is largely made up of white people, many of its residents identify themselves as Asian (18%) or Hispanic (9%) possibly making the county´s inhabitants less likely to consume or demand marijuana.
As wealthier households are much less likely to use marijuana than poor households, and those who are more educated are also less likely to use at heavy rates, King County´s impressively high education and mean and median household income levels may mean it is an unlikely candidate to demand marijuana.
Perhaps the most influential factor in King County´s marijuana market is its political leanings. As can be seen in the results map of the 2012 presidential election below, voters in King County identify as strongly democratic, so much so that King´s two-million-strong population tends to greatly influence election outcomes.
http://old.seattletimes.com/flatpages/politics/2012-washington-election-results.html
Marijuana use and legality typically see much less support among Republicans than Democrats, with only 39% of the right expressing pro-marijuana sentiments nationwide, a phenomenon very much reflected in King voters´ stance on marijuana. Voters in the county have come out strongly in support of both medical and recreational marijuana legalization, with 67% supporting I-692, which legalized medical marijuana in 1998, and 63% in favor of I-502, a 2012 ballot initiative legalizing marijuana for use by adults 21 and over. In fact, King was among the three counties that showed the most support for cannabis in the state, as can be seen in the first I-502 voting map below generated by the Center for the Study of Cannabis and Social Policy.
However, contrary to the will of the voters, the local authorities in King County have been highly obstructive to the de facto legalization and sale of marijuana, as shown in the second map below generated by the Center for the Study of Cannabis and Social Policy. This study denotes “highly obstructive” counties as those where the degree of facilitation or obstruction of I-502 implementation does not correspond with recorded voter positions for or against I-502, considered an indicator of a lack of representative local government.
http://cannabisandsocialpolicy.org/2014/10/. October 2014.
http://cannabisandsocialpolicy.org/2014/10/. October 2014.
Even though King County´s populace is very supportive of marijuana, County Government there has proven itself to be strongly against permitting local marijuana use and purchases. Because this entity wields power over local zoning laws and regulations, and can even ban marijuana stores entirely, the environment in King County may not be conducive to the growth and success of the cannabis market making investment in this market a risk.
Although medical marijuana dispensaries have generally outnumbered retail marijuana establishments in the Seattle area since 2012, the passage of Senate Bill 5052 in April 2015, under which the previously unregulated medical marijuana market will be consolidated into the regulated recreational market, as well as the passage of a measure by the Seattle City Council forcing the closure of all medical dispensaries opened after January 1, 2013, indicate recreational stores will be the only businesses in the Seattle dispensary scene.
Seattle’s highest grossing marijuana retailer as of August 2016 was Greenside Recreational, with approximately $5 million in sales between January and August.
Have a Heart is one of the area’s largest marijuana chains with four storefronts in Seattle. Although Have a Heart was originally founded as a medical dispensary, the fact it has been in business since before 2013 allows it to stay open under Seattle’s new regulations. The chain’s flagship store, Have a Heart Café (located in Seattle’s university district) bills itself as an “Amsterdam-style lounge” complete with a full-size dab bar. By limiting entrance to the consumption area to paying members, the store avoids infringing on regulations against public use and creates a business model likely to be emulated across the region as more marijuana retailers open.
Bellevue is currently home to six recreational marijuana stores: Green Theory, Greenside Bellevue, The Novel Tree, Belmar, Five Star Trading Company, and Bellevue Marijuana. Of the six, Green Theory was the city’s highest grossing in 2016 generating over $3.1 million in sales from January to August. Green Theory offers a price matching guarantee and targets tourists from out of state by listing directions from the Seattle-Tacoma international airport and providing links to local hotels and tourist attractions.
Since the Washington State Legislature has mandated medical marijuana dispensaries be phased out by July 2016, medical and recreational products previously sold on separate sides of the market are now sold together in Washington marijuana stores.
The King County recreational edibles market features an even mix of major statewide brands, smaller local brands, and unbranded products. The top four brands by market share are Magic Kitchen, an edibles line of Northwest Cannabis Solutions, Zoots, known for their infused mints and hard candies, and Botanica Seattle, producer of the “Spot” brand of bite-sized chocolates and brownies. Other major players include, Evergreen Herbal, the maker of its own line of products including an infused tea line and the distributor of Venice Cookie Company products in Washington, and Mirth Provisions, makers of the popular Legal Soda (an infused carbonated beverage).
Unlike other states, Washington forbids marijuana retailers from growing their own marijuana. As a result, retailers are unable to produce their own concentrates and must instead source all waxes, shatters, oils, and other types of concentrates from specific extraction companies or growers who manufacture their own concentrates. As a result, there are fewer unbranded concentrate products in Washington than in other markets. Furthermore, many cultivators sell flower and pre-rolls under their own branded product lines, a market feature absent in most other states. However, competition among a wide variety of extraction companies and cultivators has prevented any single brand from claiming a dominant market share.
As of August 2016, the top concentrates producer in Washington was Phat Panda, a cultivator and manufacturer of the popular Sticky Frog line, with approximately 4.2% of the market. Liberty Reach, a marijuana cultivator and producer of concentrates, currently controls roughly 3.62% of the market. The remainder of the top ten brands by market share is a mix of cultivators/manufacturers with market shares around the 1% market, such as Rogue Raven Farms, Avitas Agriculture and Kush Valley. Relatively low market shares across the board indicate continued opportunity for new brands to enter and consolidate a customer base.
Most of Washington’s edibles and concentrates manufacturers are based in Seattle. Db3, the Seattle-based producer of the Zoots brand of edibles, was the first producer in the state to receive a license to manufacture infused marijuana products. Seattle is also home to Sensi Sweets, whose products are carried in dispensaries across not only Washington but Southern California. Other popular local brands include major manufacturers such as Dama Cannabis and Evergreen Herbal, and smaller niche operations such as Craft Elixirs and Green Light Baked Goods. Demand for locally produced is likely to grow as the recreational market expands following the revamping of the state’s legal marijuana regulations.
The Seattle/Bellevue area constitutes the largest market in one of the first states to legalize recreational marijuana. Despite regulatory difficulties, a burdensome tax structure, and relatively weak demand that plagued the market in 2015, the successful merger of the medical and recreational markets, the removal of a cap on business licenses, and falling marijuana prices ensure the market will continue to see steady growth over the forecast period.
Currently, marijuana sales in Seattle are projected to total just over $296 million for 2016. While the present regulatory transition makes it difficult to determine how these sales figures will evolve past 2016 (when the transition to the new licensing system is expected to be complete) estimates show the end of the medical market will only account for a small, temporary decrease in over market growth rates . This will be in part due to medical dispensaries gradually reopening as retail stores.
With regards to the relative popularity of different types of marijuana products, flower is expected to remain the region’s preferred product throughout the next five years. Nevertheless, its share of the market is expected to shrink in the face of the growing demand for edibles and concentrates. Overall, flower currently constitutes over 65% of sales in both the medical and recreational markets, but is expected to fall to approximately 55% by 2020 as edibles grow to approximately 19% and concentrates to approximately 24%.
In contrast to other states where many dispensaries cultivate their own marijuana, Washington marijuana regulations currently prohibit marijuana retail license holders from also holding processing or cultivation licenses. As a result, Washington dispensaries must purchase the entirety of their supply from separate cultivators or processors. Consequently, marijuana available in most dispensaries is not differentiated solely by strain but the farm of origin, creating a semblance of brand recognition among the state’s larger commercial growers. For major markets such as Seattle, this has created a unique situation in which marijuana growers market their marijuana as a consumer product: many farms package their marijuana in bags featuring the farm’s logo or produce specialty lines of pre-rolls (marijuana cigarettes). In this way, the Seattle/Bellevue market creates a unique opportunity for cultivators skilled at creating and marketing niche products such as marijuana cigars or specialty hybrids.
The market may also benefit by marketing to marijuana tourists, although success will likely require significant political lobbying on the part of the local marijuana industry. Seattle features a small but growing number of recreational tourism businesses, such as bus services that tour local farms and dispensaries. Tour customers are also able to smoke marijuana on the buses, enabling them to skirt state laws against public consumption. A number of marijuana-friendly accommodations have also begun to appear and are likely to remain as they are among the only places where tourists can gather and consume marijuana in a social setting.
Until 2015, Seattle was home to two marijuana coffee shops and may have been on the forefront of allowing wider public consumption. However, HB 2136, state legislation passed in conjunction with Senate Bill 5052, explicitly bans businesses that allow marijuana consumption on the premises. Given the current legal climate, development of marijuana lounges and Amsterdam-style coffee shops is doubtful.
Over the past year, the Seattle/Bellevue market seems to have overcome most previous threats such as difficulties facing the merging of the market, a shortage of supply keeping prices high, and the possibility of a cap on dispensary licenses that would keep the market artificially small. Currently, the largest difficulties facing the market are those common to other large markets such as Denver: the inability to use financial institutions without fear of federal prosecution, the inability to claim business expenses as tax deductions, and the development of an interstate supply chain.
Regulatory Environment
In 2015, the Washington state government passed two bills that define the regulatory environment moving forward.
Senate Bill 5052, which came into effect on July 1, 2016, merged the state’s medical marijuana program into the recreational marijuana market established by Initiative 502. Under the new law, medical dispensaries must apply for retail licenses in order to stay in business. Dispensaries without a history of regulatory infractions that have been consistent in paying state taxes were given precedence during the application process, although not every dispensary is guaranteed a license. As of August 2016, many former medical dispensaries have been successful in obtaining a recreational license, yet the presence of licensed dispensaries in the area is minimal.
Besides medical dispensaries, Senate Bill 5052 also changed several key regulations regarding medical marijuana in general. After July 1, 2016, collective gardens run by marijuana patients will be prohibited and medical cultivation by collectives are limited to collectives of up to four patients with a maximum of 60 plants. Furthermore, collectives must be located at least 15 miles away from the nearest marijuana retailer. All participants in the collective must also register with the state’s voluntary patient registry. Medical marijuana is also available at retailers who hold a “medical marijuana endorsement” from the state’s Liquor and Cannabis Control Board. Patients who register with the state’s voluntary patient registry will enjoy tax breaks, higher possession limits, and permission to cultivate up to 6 marijuana plants for personal consumption.
HB 2136, which became effective July 1, 2015, made a number of modifications to I-502. Most notably, the bill did away with the three-tiered tax system in favor of a 37% excise tax levied at the point of sale. Although the bill allows local governments to enact bans on marijuana businesses, marijuana tax revenue will only be available to cities and counties with retailers physically within their jurisdictions. Cities and counties are also allowed to decrease the 1,000 foot buffer zone from sensitive areas such as schools and parks down to a minimum of 100 feet, which would greatly increase the number of available spaces for dispensaries. The bill also created a new researcher license with which license holders will be permitted to produce, process, and possess marijuana for the purposes of conducting research on marijuana and marijuana products. Finally, under HB 2136, Seattle’s existing marijuana coffee shops became illegal. The bill explicitly bans any business that “conducts or maintains a premises for the primary or incidental purpose of providing a location where members or other persons may keep or consume marijuana on premises.”
Supply
Dispensaries in the Seattle/Bellevue area may have made national headlines when they sold out of marijuana following the opening of the recreational market in 2014, but current supply in the Seattle/Bellevue area is expected to meet demand for the foreseeable future. The fall in the average price of an ounce of marijuana from over $300 in 2015 to roughly $240 as of August 2016 is indicative of growing supply.
Demand
Fluctuations in the regulatory environment, high prices, and a relatively small proportion of heavy marijuana users have all contributed to lackluster demand in the Seattle/Bellevue market. Although recreational demand spiked following the opening of the recreation market, total demand in the Seattle/Bellevue legal marijuana market is projected to grow by less than 1% annually over the next few years. Still, the upcoming transition of the medical marijuana market, the imminent closure of many medical dispensaries, and the new tax system all make it difficult to determine to what extent this trend will hold.
Competition
Competition in the market is expected to steadily increase over the forecast period, driven by the removal of the cap on marijuana business licenses by the Washington Liquor and Cannabis Control Board and steady demand in the market. As the recreational market matures and attracts more investors, it is likely there will be a development of larger scale operations and chains of dispensaries similar to those emerging in Colorado's retail market.