The pot-growing industry is expanding into warehouse operations at a rapid rate creating a whole new kind of high-paying tenant – and an unusual set of risks for stakeholders.
Cannabis research and investment firm ArcView says that legal sales of pot grew 34% last year to $6.7 billion. It expects the industry to hit $22.6 billion by 2021, just four years from now. ArcView points out that very few industries hit $5 billion in annual consumer spending, and then grow at the anticipated 25% annual rate of this industry. The ArcView Group says it has 625 investor members who’ve now put more than $100 million dollars into 137 cannabis companies. Real estate executive George Stone of the Witkoff Group says: “This is a new segment of the industrial real estate market that is being created in front of our eyes,” He says: “It’s a huge industry and only getting bigger.” As this industry blossoms like the weed it is cultivating, adventurous investors are getting in on the ground floor. But the ground floor is also governed by laws, and those laws vary wildly from state to state. As of November of last year, eight states had approved the legalization of both recreational and medical marijuana. Those states include Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington state. Voters in Washington D.C. also approved the full legalization of marijuana, but Congress has blocked the commercial sale of pot there. As for the other 42 states, Wikipedia says that 36 of them have legalized medical marijuana in some form. Some only allow the non-psychoactive version of medicinal pot. One state has decriminalized marijuana possession. In the other five states, possession and sales are completely prohibited.
Real Estate Opportunity Growing Like “Weed”
The cannabis revolution is taking place rapidly. The New York Times writes that old factories, warehouses, and self-storage units are being quickly repurposed for marijuana-growing operations. And that suburban storefronts and boutiques are turning into shops selling a gourmet selection of pot products. According to the Times, commercial developers have never seen such a rapid transformation in the real estate industry. California was the first state to approve medical marijuana back in 1996. In 2012, Colorado and Washington were the first states to legalize cannabis for recreational use. Colorado was a trailblazer in the implementation of its new law. That spawned a whole new real estate market. An industry report from 2015 says that lease rates surged about 50% for suitable warehouse space in Denver and that warehouse sale prices doubled. It also said that the number of shops selling marijuana surpassed the number of licensed liquor stores by 5%. They also outnumber Starbucks. The Times says there are now five times the number of pot shops in Denver, as there are stand-alone Starbucks shops. This is a transformation is sweeping across much of the nation and investors are taking notice There’s even a cannabis real estate investment trust trading on the New York Stock Exchange. But, regardless of the apparent success of the industry and the legalization of marijuana in some form in many states, pot remains “illegal” under federal law.
Federal Pot Status Creates Investor Risk
There’s some concern that the Trump Administration may be less tolerant of state legalization laws. Attorney General, Jeff Sessions, said in recent statement on drug enforcement: “I reject the idea that America will be a better place if marijuana is sold in every corner store. And I am astonished to hear people suggest that we can solve our heroin crisis by legalizing marijuana – so people can trade one life-wrecking dependency for another that’s only slightly less awful.” The California Growers Association is not overly concerned about federal enforcement. It said in recent blog, that Sessions is mostly opposed to adult-use of marijuana. And it says that that would create a complex enforcement operation because federal authorities would be going after growers who provide both medical and recreational pot. The Association also says that President Trump doesn’t appear to share the Attorney General’s antipathy toward pot. Instead, he has expressed support for the use of medical marijuana and he believes that adults can make up their own minds about recreational pot. In California, lawmakers are also considering legislation that would turn the state into a “sanctuary state for cannabis”. That would prevent state officials and law enforcement officers from helping federal authorities in any enforcement efforts. Despite the confidence expressed by that blog, the contradiction in federal and state laws creates a “legal gray area”, and limits funding options for growers. Many banks and institutional lenders won’t approve loans for pot industry buildings. Instead, growers have turned to private lenders and investors. If the federal government opts for stricter enforcement, those investors could be at risk. On the other hand, federal enforcement doesn’t appear to be an immediate threat right now. There’s also the chance that the federal government might swing the other way, and legalize pot. If that happened, the industry could shoot off like a rocket. Although we are not close to federal legalization yet, The Hill reports that two Oregon Democrats are pushing for a new federal marijuana tax. It’s a 64-page bill called The Marijuana Revenue and Regulation Act or MRRA. It proposes a tax based on price for the first five years. After that, taxes would be based on weight or the amount of THC in the product. That would account for market pressures on price as more growers compete for customers.
Cannabis Commerce is Expensive
So just how expensive is the warehouse operation? As an investor, you would need to think possibly millions of dollars in upgrades. The Times cited one entrepreneur who’s converting a former tool factory in western Massachusetts. The price tag is expected to hit $3 to $4 million dollars to install the needed equipment. If you’re tempted to get into this market, take a hard look at the numbers. And give yourself a head start by investing in states that are new to the game. There may be less competition, and more opportunities. It may be hard to avoid speculation in an industry that is changing so rapidly. The New York Times writes that in some locations, property values and rents are already showing signs of a bubble. If you prefer a more traditional investment strategy, give us a call. You can sign up for a free strategy session to see how the residential rental market might work for you.
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