The surge in legalized marijuana for both recreational and medicinal use keeps creating possibilities for the commercial real estate (CRE) market and its investors.
Recreational and/or medical marijuana is now legal in more than 30 states -- it's only fully illegal in eight states -- and it's reasonable to expect more will follow soon. In response, what had been a strictly black market is now a legitimate pursuit and fast-growing industry across much of the country.
A report from consumer research specialist IBISWorld projects the number of marijuana production, processing, and sales businesses to grow from 17,745 in 2019 to 35,649 in 2024 -- and that was before the latest spate of legalizations. And Grand View Research estimates a compound annual growth rate (CAGR) for the cannabis industry of 18% through 2027.
Meanwhile, a major barrier, especially when it comes to banking services, is that pot is still illegal on a federal basis. The U.S. House of Representatives in December passed its latest version of legalization, and a Senate version is expected soon. With the upper chamber now under Democratic control, albeit by the slimmest of margins, this could be the year the national prohibition against marijuana goes up in smoke.
That's hardly a given, though. Regardless, the legal marijuana business is growing fast, along with its impact on the CRE marketplace. Here are three ways how.
1. Some new occupants for vacant retail space
Remember what happened when the floodgates opened for CBD products? Stores popped up everywhere. The same could happen with legal marijuana in coming years as the barriers drop. In a February 2020 report titled "Marijuana and Real Estate: A Budding Issue," the National Association of Realtors says about 19% of its membership in states where marijuana is legal already was reporting an increased demand for storefronts.
2. Pot places become part of the bar and restaurant scene, like brewpubs
An insightful piece posted recently by the Commercial Observer -- titled "Marijuana Retail Leasing Faces Blunt Challenges as Legalization Spreads" -- points to the boom in brewpubs as an example of what could happen with the legal unshackling of recreational marijuana. It's speculative but interesting.
That article notes: "The (legal and tax) changes made breweries and their taprooms ubiquitous features of the built environments of cities and towns nationwide. Some breweries catalyzed wider neighborhood changes, spurring higher property values and drawing development, as well as new residents."
A notable example the article cites: Denver's LoDo District, whose development began with a brewpub co-founded by a former geologist who went on to become Denver's mayor, Colorado's governor, and now U.S. Sen. John Hickenlooper. That industry has friends in high places. Legal pot could follow.
3. Legal marijuana as a tenant of industrial property
Indoor growing dominates legal marijuana production, and there's a burgeoning business there for providers of that industrial space. Just one example: Innovative Industrial Products (NYSE: IIPR), a real estate investment trust (REIT) that specializes in leasing and providing capital to legal marijuana growers. The company acquired 20 properties in the past year alone and now has 63.
Look for others to join the fray, adding to the opportunities for investors in either public stocks or private equity for these kinds of larger-dollar opportunities. And if demand becomes great enough, there even could be smaller warehouse operations popping up, like the move now toward last-mile logistics in e-commerce.
The Millionacres bottom line
The legal marijuana business is just beginning to show its potential. It's different from Prohibition when it ended. There are multiple licensing, taxing, and zoning hurdles to contend with, and every locality will have its own rules for a lot of this.
Plus, investors need to know, as the Commercial Observer article points out, that the whole investor-landlord-tenant relationship for this kind of business could be more complicated than most, as well as the financing.
That said, brokers are emerging who specialize in this kind of real estate. One example is 420property, if you want to explore what's out there.
Or, you can keep it really simple and just invest in publicly held companies. There are already a number of growers and producers trading on the exchanges, and at least one operation -- Canada's Ceres Group Holdings (LSE: CWR) -- plans to expand a network of retail stores through a merger and a special purpose acquisition company (SPAC) heading for an IPO. Read about that here: "A $1.9 Billion Canadian IPO Could Make L.A. the 'Center of the Cannabis Universe.'"
High hopes, indeed.