"No Stopping the Influx of Capital" Into Cannabis Real Estate
A new report from Colliers finds tremendous demand in the cannabis sector, despite incongruence between federal and state laws.
“There is no stopping the influx of capital coming into this behemoth,” says a new report on cannabis real estate from Colliers. In California, the market is already proving to be tremendously popular. In 2020 alone, the market has racked up $2 billion in total tax revenue and $4.4 billion in sales. The report estimates that there is a market of 4.5 million consumers for the product.
Despite the clear demand, there are challenges to operating in the space. Cannabis is still considered a controlled substance under federal law, and while there are now 33 states that have legalized usage, the federal prohibition has pushed traditional capital sources, like banks that are federally regulated, out of the market. It also has restricted the real estate market for cannabis tenants. Nine out of 10 property owners in the Bay Area will not lease to a cannabis tenant, and institutional owners do not allow cannabis users.
Property owners that will consider a cannabis usage are able to charge a premium, both because of the limited availability of cannabis-friendly space as well as for taking on the risk of collecting income from a federally illegal business operation. In addition to premium rents, cannabis users are also more flexible with their leasing needs and take smaller spaces.
However, a green rush could be just around the corner. With a left-leaning government in control, cannabis is nearing legalization. The industry is expected to have an economic impact of $71 billion annually. In anticipation, both small, mom-and-pop operations and large, well-known national companies are expanding their footprints and buying new locations in both industrial and retail assets.
The real estate uses are even more expansive than the current retail and industrial opportunities. Well-known chains like Burger King are looking at becoming dispensaries, just one example of how cannabis will be used by existing brands to drive revenue in struggling properties, particularly after the pandemic.
If current sales are any indication, there is a lot of profit to be made. The legal cannabis market grew about 45% in 2020 and US cannabinoid sales are expected to top $24 billion in 2021 according to BDSA, a top cannabis market research firm.