Legalized marijuana has done more than ignite social debate and fuel tax revenue. It also has changed real estate market dynamics in states that have legalized the sale of the drug for recreational or medical purposes.
One in five Americans live in the eight states and District of Columbia, where nonmedical, or recreational, marijuana is legal, according to an article published earlier this year on BusinessInsider.com. If you count the states that legalize medical marijuana, the tally is approaching 30 states, according to the National Conference of State Legislatures.
Driving the dynamics of the market is the huge demand for legalized pot. The market for legalized weed is growing at the pace that broadband internet grew in the 2000s, according to Melia Robinson’s article on the topic. In 2016, marijuana enjoyed $6.7 billion in revenue in the U.S., up 30 percent from what it was in 2015. And by 2021, the North American cannabis market is expected to soar to $20.2 billion, according to a report by cannabis market research firm Arcview Market Research.
So what does this have to do with real estate? A lot, apparently.
Factory, warehouse, and self-storage facilities’ landlords and property owners are repurposing the industrial properties to accommodate the cultivation and processing of pot plants and products. Warehouses are especially attractive to cannabis manufacturers because the facilities tend to be large enough to house thousands of plants, can feature the needed climate controls, and are somewhat private and easy to secure, according to New York Times’ reporter David Gelles’ April 1, 2017, article “A Real Estate Boom, Powered by Pot.”
Warehouses are especially attractive to cannabis manufacturers because the facilities are usually large enough to house thousands of plants, can feature the needed climate controls, and are somewhat private and easy to secure.
That’s while retail property owners retrofit strip malls and more for cannabis storefronts, according to Gelles.
Marijuana businesses make lucrative tenants because landlords and property owners charge them a premium—sometimes, two to three times market rates for space, according to an April 4 article on Realtor.org.
A prime pot example
For those wondering what the impact of legalized cannabis looks like on a local real estate market, there’s the example of Denver. The business has a firm foothold in Colorado, which legalized pot for recreational use in 2012. The average asking lease price on warehouses in the Colorado state capital rose more than 50% from 2010 to 2015. Today, retail pot stores in Denver outnumber stand-alone Starbucks locations by five-fold.
As a result of the potential for a cannabis-driven goldmine, a real estate trust Innovative Industrial Properties has emerged. The cannabis-related I.P.O., which went public on the New York Stock Exchange last December, buys properties and retrofits the buildings to accommodate and house medical marijuana growers, according to the New York Times.
Cost may outweigh the benefit
While it may seem like the pot business’s impact on real estate has nowhere to go but higher, there are signs that this might be another real estate bubble in danger of bursting.
The pot business is expensive for those trying to lure cannabis tenants into their properties, as well as for the companies manufacturing and selling marijuana. Turning a warehouse into a friendly facility for growing pot can cost millions. And the costs to run a growing facility in electricity, alone, can drain profits for pot businesses.
Are you a real estate professional in a state where marijuana use for recreational or medicinal purposes is legal? How is it affecting your market? Comment below!
Other factors could deflate the market. In mature markets, supply is higher than demand, which means prices for marijuana could come down. Perhaps the most disconcerting is pot is illegal at the federal level. In essence, the business is founded on the assumption that the federal government isn’t going to enforce its laws, according to the New York Times.
Interestingly, a move by the federal government to legalize marijuana also could negatively impact industrial property owners. The interstate commerce that could result from legalized marijuana at the federal level might cause growers to seek less expensive outdoor options for growing the plants, leaving warehouses and other owners with expansive properties designed for growing pot.