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Cannabis & CRE: A Budding Industry

New green rush? While the Western states mature from the early green rush, cannabis legalization is surging on the Eastern part of the country as states look for economic recovery in the wake of the pandemic. While local laws vary, medical marijuana is legal in 36 states and recreationally allowed in 17 states. Tracking $26 billion in sales for 2021, the legal cannabis industry is expected to reach $46 billion by 2025 (per Marijuana Business Factbook) driven by new markets. States legalizing cannabis are likely to affect neighboring states that don’t want to lose this revenue to someone else. With NJ and NY having just legalized recreational marijuana, the east coast states of CT, DE and RI could follow suit.

How is this impacting commercial real estate? When states come online, demand for properties to grow, to store and to sell cannabis rises. According to NAR, warehouses typically see demand increase by 34% in states where medical use is legal and by 27% when recreational is allowed. Storefront demand goes up by 31% (in medical-only states) and by 17% (recreational added). Land demand increases by 18% (in medical-only states) and by 14% (recreational added). Home values within half a mile of a cannabis dispensary increase on average by 7.7% (WEAI study). As lease addendums that restrict growing on the property rise, business owners have resorted to purchasing rather than leasing over the past year — particularly in states with newly legal recreational use. Warehouses saw the biggest bump, followed by land and then storefronts. 

The majority of property owners are not leasing to cannabis companies. Why? The biggest concerns relate to smell and theft on the premises, followed by fire hazards and moisture issues. Other hurdles that investors face include difficulty procuring bank loans, pricey insurance, and cash-only transactions. Most of the cannabis financing to date has been through specialized lenders such as private equity and local credit unions. This could all change with the approval of the SAFE Banking and CLAIM Acts (currently making its way through Congress), which would allow banks and insurers to service cannabis companies without the threat of federal penalties. Coldwell Banker Commercial professionals have noted that while it’s gotten easier to find spaces to lease over the last three years, it is still tough overall and requires knowledge of real estate and an understanding of state and municipal requirements

What are investors looking for? Despite all the challenges and regulations, most dispensaries, cultivators and infused product companies are highly profitable, with average operating margins between 15% and 25% (per public company filings). Each business model has a key design challenge to think about:

  • Dispensaries: whether you decide to provide a “retail store” environment with a very clear point of sale; a “consultative approach” like a doctor’s office; or a “community space” where people can gather with others who partake in cannabis — it needs to be a safe space. Security (e.g., camera system, vault, truck area) will be the primary thing that the state will look for when it comes to licensing.
  • Industrial facilities: this is where you grow and process the product. The key factor to consider is the ability to control the climate because this plant is very temperamental and sensitive, so you need a facility that can adjust for weather and lighting round-the-clock.

What kind of adjacencies do operators prefer? Investors typically want single-tenant, net-lease standalone buildings because they are easier to sell in this specific market. Tenants want strong visible strip centers so they can capitalize on the foot traffic. Tenants also like to be next door to doctors and medical offices that can prescribe it. For recreational use, Coldwell Banker Commercial professionals observe that retail clients believe the best sites are where two major streets converge and locations right off the highway. Freestanding buildings are the preferred format because it solves a major security issue: gives the owner a 360-degree view of the parking lot. As it stands today, most operators take what is available because finding space that meets regulations is still difficult and dependent on what each state allows.

What should you look for? The first thing to find out is how the state stands on decriminalization. Then see if medical marijuana has been legalized. If so, then permitting recreational use is usually not far behind. Community pushback comes early on when local laws are being changed. And while every jurisdiction is different with their own codes, the area is fully behind the concept by the time you’ve broken ground on a project. 

Conclusion. According to the Pew Research Center, an overwhelming majority of Americans (91%) support legalizing marijuana for either medical or recreational use. This shift in acceptance has opened the doors for progressive legislation and financial opportunities, as well as pushed more states to look at legalizing it. During the COVID-19 induced recession, the legal cannabis industry powered on (as it was deemed an “essential” business). We believe new consumers, patients and markets will continue to support future growth and investors should look at areas where dispensaries plan to open or recreational cannabis becomes newly legal for investment opportunities.

 

Jane Thorn Leeson is a Research & Resources Analyst with Coldwell Banker Commercial.

Coldwell Banker Commercial®, provides commercial real estate solutions serving the needs of owners and occupiers in the leasing, acquisition and disposition of all property types.  With a collaborative network of independently owned and operated affiliates, the Coldwell Banker Commercial organization comprises almost 200 companies and more than 3,000 professionals throughout the U.S. and internationally.

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