Cannabis Companies Say It’s Better to Lease Than to Buy

Cannabis companies are buying commercial real estate for their businesses to a lesser degree and are choosing to lease space to a greater degree, according to a new report from National Association of Realtors.

Since 2021, the share of NAR members reporting increased purchasing over leasing by marijuana businesses dropped from 29% to 18%.

State laws have evolved to legalize the use of prescription and recreational marijuana, according to a prepared statement from Jessica Lautz, NAR deputy chief economist and vice president of research.

“As more states adopt cannabis laws, realtors are at the forefront of commercial real estate activity and are working with clients to find land, warehouses, and storefronts for this growing business.”

Alex Kuby, AIA, Associate Principal, Hospitality and Interiors, RDC, tells GlobeSt.com that the continued legitimization of the cannabis industry and clear profitability of the sector in parallel to the challenges commercial real-estate landlords continue to face in attracting traditional tenants has created symbiotic opportunities on both ends of the equation.

“Legitimacy gives landlords more confidence in these high-cashflow businesses as tenants and cannabis retailers have access to a lower-leverage start-up and operating business model,” Kuby said.

Financial Flexibility is ‘Imperative’

Nathan Siino, Senior Vice President, Advisory for Green Street, tells GlobeSt.com, “The asset-light model of leasing property is not new to commercial real estate as it provides operators with additional financial flexibility and diminishes the upfront costs that would be needed to purchase operational-ready assets.

“Additionally, given that many of the cannabis operators are young companies without the same access to capital available in other industries, additional financial flexibility is even more imperative. Today’s tighter credit markets and higher interest rates are likely passed on to the operators in the form of higher lease rates.”

Entrepreneurs More Likely to be on Retail Side

Jason Little, partner, Farrell Fritz, tells GlobeSt.com that as a general matter, the current real estate market combined with current cannabis industry conditions are likely the culprit for the uptick in commercial leasing as opposed to purchasing.

For example, established markets, such as Colorado, Massachusetts, and California, are far more developed vis-à-vis their agricultural, distribution, and supply infrastructure,” he said.

“New entrepreneurs in the cannabis space are far more likely to be on the retail side and looking for leased storefront space,” Little said. “That is consistent with the trends discovered.”

The same holds true for states that have more recently legalized cannabis, he said.

“New York, for instance, incentivizes smaller businesses and limited individuals to obtain the first licenses from agricultural to retail in a regulatory system that prohibits vertical integration,” according to Little.

“Those small businesses on the agricultural, processing, and distribution side already owned land and facilities to hit the ground running – particularly as the time frame for obtaining a license and realizing a return on investment is uncertain.

“Moreover, the retail market is gearing up to be the biggest development for the newly legalized states, and those folks are looking, in large part, to lease storefront space.”

Cannabis Still ‘Taboo’ for a Lot of Investors

Larry Much, executive vice president, Industrial Services, NAI Hiffman/Hiffman National, just secured a Franklin Park, Ill.-based facility for craft grower Cannect Wellness, which has begun the buildout.

He tells GlobeSt.com, “The market is still growing for warehousing (craft grow facility) to dispensary (more retail) properties and land, although land is becoming more of a zoning and use issue,” Much said.

NAR added that commercial practitioners are also finding increased demand for warehouses, land, and storefronts for marijuana businesses.

“In states where only prescription use is legal, 23% had seen an increased demand in storefronts, 14% in warehouses and 7% in land,” according to the report.

In states where prescription and recreational use is legal, 25% to 29% of members had seen an increased demand in warehouses, 18% in storefronts, and 13% to 15% in land, the report showed.

“While legal in many states, cannabis is still taboo for a lot of investors, forcing many cannabis businesses to purchase assets,” Much said.

“At the same time, it also has been difficult for users to get traditional financing even with stellar credit as many lenders can’t finance these types of properties; some need to lease.

“Buildout costs for producers are significant. This makes it difficult for the user to move, which could benefit landlords. In some cases, the entitlement also may make it tough to move.

“While I have heard some landlords inserting smoking clauses, I haven’t seen it personally. But I think it is wise for landlords to protect themselves with such clauses to prevent problems and spell out ramifications. For example, a landlord might say to a user because of smoking in the office we now have to redo the office at your cost.”

Tenants ‘OK’ With Paying a Premium

Jaime Sturgis, CEO and founder of Native Realty, tells GlobeSt.com he has seen a lot more inquiries in this space.

“Typically, the tenants will pay a premium and are okay doing it,” he said. “One told me today that they are comfortable paying 20% over market value to secure locations.

Landlords want more money because it’s often harder to sell the properties due to the use and the restrictions banks and loans can have because marijuana remains illegal at the federal level.”