Cannabis leaves

How the cannabis industry is disrupting commercial real estate and the banking industries while injecting $14 billion into the U.S. economy.  

The Cannabis Industry and Its Fascinating Impact on CRE

March 17, 2020

What industry has been hiding in the shadows but only just legally begun showing its true green color?

You guessed it: the cannabis industry.

Once an $80 billion, strictly illegal industry, the legalization of medical and recreational marijuana in some states has shifted nearly $14 billion into a legal cannabis market in 2019.

That's a 32% increase over 2018 numbers.

And the shift is exponential: the global legal marijuana market is expected to hit between $57 and $73 billion by 2027, according to reports published by Arcview Market Research and Grand View Research, Inc.

Today we'll look at the major challenges and opportunities surrounding the legal marijuana market and its impact on commercial real estate.

 

ALL GOOD CHALLENGES COME IN THREE

Making Room for Marijuana

While there certainly are more than three challenges to any market, the marijuana market is unique in its first and major challenge: the product is still a Schedule I Controlled Substance.

The industry currently can only operate in 33 states for medical purposes, and 11 states for recreational use.

And within those states, cannabis licenses are difficult to acquire.

This shortage of opportunity and space is one of the greatest barriers to entry in the market, and as any economics student would guess, it's generating a supply-demand imbalance.

Consequently, cannabis real estate values continue to rise, encouraging the growth of offshoot markets such as brokerages dedicated to the buying and selling of cannabis licenses, businesses, and real estate, compliance platforms, and so on.

 

Handing Over All the Cash

As the multifamily market is boosted by record-low long-term interest rates and the temporary waiver of the three-year rule for HUD 223(f) mortgage loan applications, the cannabis industry is backed into a very tight financing corner.

Federally insured banks, despite witnessing the exponential growth of the marijuana market, are nervous about investing in, or granting banking access to, the colloquial pot shop; the federal government sees marijuana-related transactions as illegal activity, effectively scaring major banks away from the industry.

The landscape is so narrow, only 8.4% of all U.S. depository institutions are players, according to data from the Financial Crimes Enforcement Network (FinCEN).

But there's one financial institution leading the cannabis deal financing pack: Radius Bank, recently acquired by LendingClub, has successfully lent on five cannabis deals since 2018. Even then, their position is strategically indirect; the funds were lent to landlords intent on leasing to cannabis-related business.

The only options remaining for cannabis entrepreneurs are equity funding, debt funding through alternate lenders, and of course, self-funding.

 

Restricting Movement

As an emerging industry (at least in the legal sense), cannabis faces a lengthy, complicated zoning regulation process.

Despite state-level legalization of their enterprise, cannabis businesses must still face municipal regulatory bodies before they can open doors to long lines of customers.

In many cases, local zoning laws are tools leveraged by local leaders to restrict regulated cannabis in their communities.

This is widely observed on the east coast: in New Jersey, 45 towns formed a coalition to restrict the regulated cannabis industry.  

In the city of Warren, Maine, marijuana cultivators are prohibited from growing the plant for the recreational market, but are permitted to continue growing marijuana for medical use.

 

BUT IT'S NOT ALL DOOM AND GLOOM

With every emerging market comes new opportunities, and the budding marijuana market is poised to make a significant impact on commercial real estate.

 

Calling Upon the Best and the Brightest

As cannabis investors put on their pioneer cloaks, they're looking for "really smart people who can deal with a dynamic, fast-paced industry," says Wendy Berger, Board Director at Green Thumb Industries, a multi-state cannabis development firm currently operating 13 cultivation locations and over 40 stores.

“There’s no yellow brick road that says, ‘Here’s how you can make this work,’” says Berger.

From financing barriers to custom development standards, the continued growth of the cannabis industry will depend on real estate professionals with the necessary experience and network to bring each project to completion.

 

Leveling the Playing Field

Many cities and towns are not only welcoming the influx of cannabis-transaction tax dollars, they are also establishing programs to lower barriers to cannabis licensing for those hardest hit by the war on drugs.

San Francisco pioneered the idea with its Cannabis Equity Program, enabling verified Equity Applicants to apply for a cannabis permit, receive a waiver of the $5,000 permit fee, and benefit from an incubator partnership that provides free retail space for three years.

On the opposite coast, Boston has rolled out its own Economic Equity Program, enabling Kobie Evans, a real estate agent, and Kevin Hart, a health care practice manager, to open the city’s first recreational cannabis shop.  Both lived in areas with high rates of arrests related to marijuana.

Evans believes the store will help partially offset negative effects caused by the war on drugs, and create balance.

"That's what equity is, is its balance," says Evans. "You balance out what has happened in a negative light and create something positive in the community."

 

A Welcome (and Needed) Face Lift for Retail

Aside from the sheer volume of dollars circulating within the cannabis industry, its favorable impact on the national economy is also proven by how it's consistently lifting commercial real estate.

Retail banking has seen widespread closures in recent years, with net branch closings reaching 1,947 in 2018, up from 1,919 in 2017. 

Meanwhile, the cannabis industry is blasting off and desperate to find ideal locations to conduct business.

The conclusion?

"Bank branches work well," says Anthony Coniglio, CEO of NewLake Capital Partners, which a real estate partner to cannabis businesses specializing in sale-leaseback deals. "They tend to be stand-alone sites in high-traffic locations; there's security installed; and they're designed to move people."

Not impressed?

How about these stats: States where medical and recreational marijuana have been legalized for more than three years have seen more increases in demand for commercial properties—specifically, 42% saw an increase in demand for warehouses, 27% an increase for storefronts, and 21% an increase for land.

Whether or not you view the cannabis industry as "the next big thing," it's proving to be a market we can't ignore.