Banks, drive-throughs, and pharmacies come to mind when you think about net-lease properties, but have you considered the cannabis industry? The cannabis real estate market is in the early stages of a long-term growth cycle as more states begin legalizing its use for medical and recreational purposes. To date, 39 states have legalized its use for medical purposes, and 21 have legalized it for recreational use.
Today's Re:Cap features Barry Wolfe, the Senior Managing Director of Marcus & Millichap's Wolfe-Lipskey Group in Fort Lauderdale. He specializes in retail and net-lease investment sales, completing over 700 transactions in over 40 states, and is a leader in the Florida Cannabis Real Estate market.
Breaking the Stigma
Barry began to get more involved in the nuanced market around five years ago, primarily because it was less competitive than selling a Taco Bell. But one of the biggest challenges of breaking into the industry was the stigma cannabis dispensaries carried. As public and investor perception has changed over time, a fresh opportunity in real estate emerged. In the beginning, many landlords thought cannabis dispensaries would draw an unfavorable crowd or look grungy. Some tenants also pushed back on the idea of being located next to one. However, today it is quite the opposite; most dispensaries are well-lit, modernly designed, and resemble an Apple Store. Today, shopping center owners are competing to lease dispensaries because of their proven sales, increased foot traffic, and ease of co-tenancy.
According to Wolfe, the cap rates are generally higher than a typical national fast-food property, but this market has been well received by 1031 buyers and driven cap rates down over time. One thing to note is it challenging to obtain financing; Federal or FDIC banks cannot lend on these assets because cannabis is still federally illegal. Although most deals are closed in cash, the lending that does happen in the space is predominantly from Credit Unions and State Chartered Banks. The "green" legislation on a federal and state level is also aiding the industries' growth. The Secure and Fair Enforcement (SAFE) Banking Act is a bill designed to allow cannabis companies to access mainstream financial services. Unfortunately for the industry, the SAFE Banking Act failed to hit the Senate floor in December of last year. The bill has a major impact on the market as it will flood the industry with more capital, further expanding the cannabis real estate market.
Another impact on cannabis asset pricing is the limited inventory, as most municipalities have unbending zoning restrictions. In addition to the land-use restrictions, there are setback requirements from schools, churches, and even parks. These setbacks can range from a few hundred feet to over a mile. Another common regulation limits the number of dispensaries in a given market, limiting oversaturation. Even in an established market like Denver, Colorado, only 9.5% of the city can legally accommodate dispensaries. Landlords who are lucky enough to satisfy all the requirements now have the opportunity to put a premium on rent.
The cannabis industry is worth $6.7 billion and is estimated to grow 27% annually over the next five years. FlowHub estimates the industry will be worth $100 billion by 2030. Therefore, it is quite an opportunity for the real estate investor as the industry demands warehouses, land, and retail storefronts. Over the past 18 months, Wolfe has transacted 31 cannabis-related deals in Florida and other states and says the investment demand is increasing as public perception changes. Additionally, with the changes in federal and state legislation, we expect to see an influx of capital into this market over the next five years.
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