In the United States, there are currently 30 states and the District of Columbia with laws recognizing the legal use of medical marijuana for various health issues, and nine states and the District of Columbia have adopted laws legalizing marijuana for recreational use. Some medical marijuana laws are broader than others, covering a wider range of medical conditions. The laws also vary from state to state regarding which products that can be sold to treat medical conditions. State legislation addressing recreational use also varies greatly from jurisdiction to jurisdiction.
Once legislation is passed (for either medical or recreational marijuana), a state creates a multitude of rules addressing, among other things, licensing of retail shops, cultivation/manufacturing facilities and warehouses, and the type of products that can be sold. State laws have strict guidelines addressing where facilities and retail shops can be located.
Marijuana remains a Schedule I Controlled Substance and is illegal under the Federal Controlled Substances Act. Therefore, transactions involving marijuana activities could violate federal anti-money laundering statutes and other federal laws. Nonetheless, people think it’s a business worth investing in as the industry is growing wildly, from local businesses to Wall Street investors. A recent Gallup Poll indicated that 64% of Americans favor the legalization of marijuana.
So how does the growth of the marijuana industry affect the real estate business? The marijuana industry can't conduct business without real estate. Unlike some “virtual” businesses, it needs real estate to cultivate, manufacture, warehouse and sell product. As a result, some cities are seeing a real estate boom powered by the marijuana industry.
In cities where cultivation and manufacturing is legal, the industry has caused a spike in warehouse and other industrial property values. Data centers, self-storage properties and factories are all being repurposed for cultivation and manufacturing of marijuana. Land values have escalated in states where outside cultivation is permitted.
Since marijuana can't be transported across state lines due to federal law, it must be cultivated in the state in which it will be sold and consumed. This has led to the marijuana industry helping to revitalize deteriorating industrial districts in cities where warehouses and factories are being converted into cultivation/manufacturing facilities and retail shops. Warehouses—the most prominent asset type in the industry—are particularly accommodating for conversion to cultivation/manufacturing facilities because they are large enough to hold thousands of plants and can be modernized to be climate controlled.
Additionally, retail shops have helped revive some suburban strip malls. This young industry is re-shaping cities like Denver, Colo., Quincy, Mass., Monterrey, Calif. and Portland, Maine. Where an industry is growing and new businesses are opening, new jobs are created. In Colorado, there are now more marijuana dispensary locations than Starbuck's and McDonald’s locations combined.
There are, however, valid concerns for real estate owners who are considering transacting business with the marijuana industry because of the current conflict between state and federal laws. As a result, real estate owners typically charge above-market rents, sometimes for properties that had been sitting empty. Research published by CBRE in 2017 found that Denver warehouse leases signed for use by the marijuana industry from 2014 to 2016 exceeded market rents by two-to-three times.
Real estate owners must rely on local banks for financing, since the industry is still illegal under federal laws. Consequently, banks that have federal charters (such as national banks and federal savings banks) and are regulated and are insured by federal agencies (such as the FDIC) can’t do business with marijuana business owners. However, more and more local banks in states that have adopted laws legalizing marijuana for either medical or recreational use are willing to work with the marijuana industry and its landlords, though frequently at higher interest rates. Where local banks are not willing to take the risk, marijuana business owners must operate as cash businesses, leading to higher security risks.
Even REITs have been established focusing exclusively on the marijuana industry, including Innovative Industrial Properties (IIPR), listed on the NYSE. IIPR was founded in December 2016, conducted an IPO in late November 2017 and has paid dividends to its shareholders every quarter. IIPR owns medical-use marijuana facilities typically leased to growers under long-term leases. It owns properties in multiple states, including Arizona, Maryland, Minnesota, New York and Pennsylvania. IIPR recently purchased a property in Arizona and entered into a lease with a medical cannabis operation for 385,000 square feet. Another private REIT, Kalyx Development, is also focused on the marijuana industry. Kalyx owns nine buildings in four states focused on the manufacturing facilities.
In contrast to the state and local legalization process in the U.S., marijuana will be legal nationwide in Canada starting October 17, 2018, and each Canadian province will establish its own rules for sales. Canadian cities and other jurisdictions may also set their own local regulations. It will be interesting the see how the Canadian commercial real estate industry responds to these new opportunities.
The marijuana industry appears to be full steam ahead and is taking the real estate industry with it. Will your real estate portfolio and market benefit from the boom?
As a member of Ballard Spahr's Real Estate Department, Keli Colby advises real estate owners in Washington, D.C. and nationally on a range of matters including property acquisitions and sales, joint ventures, leasing and development matters, including development management agreements, air right leases and REAs. She has worked in the real estate industry for 28 years. Prior to joining Ballard Spahr she was Vice President, Counsel of Boston Properties, Inc., a prominent national real estate investment trust. Colby is a member of CREW Washington DC.
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