The cannabis industry has had a complex history in the United States but has gained momentum in recent years as states such as California legalize the substance for recreational use. Since Proposition 64 was passed in November of 2016, the sector has grown tremendously, driving demand for commercial real estate. According to a new report titled “Cannabis and The Commercial Real Estate Landscape” released by Colliers International, the commercial real estate industry stands to gain from the expansion of cannabis-based businesses.
Nationwide, the estimated economic impact of the cannabis industry comes to about $71.4 billion. In 2020 alone, the industry generated $4.4 billion in sales in California. Additionally, the number of dispensaries in the state has grown from 261 in 2016 to more than 500 to-date. Colliers also noted that there were 1,394 active cannabis licenses in California.
The increasing number of licenses, as well as an increase in sales volume, means that cannabis-based businesses are on the hunt for commercial real estate. While still nascent in its evolution, Colliers believes that the industry is one to watch closely in the coming years.
“After Prop 64 was passed, nobody was really touching it; I think people were scared at first,” explained Colliers International Vice President Spencer Bones. “But I see an opportunity in just the simple fact that this is an emerging market.”
Bones explained that the industry is in the midst of its second “Green Rush.” The rush initially started off in 2017 as a large number of cannabis businesses sought to establish physical roots and home bases in Northern California. Now, in 2021, a second Green Rush has come as these businesses continue to work to grow their reach.
“The whole motivation [in the first wave] with tenants and buyers within this niche was speed to operation,” said Bones. “Everyone was trying to get to market, show their brand, show their flower, oil, distillate, and to get their brands to market. The second wave now is that these guys are trying to expand.”
Colliers Research Analyst Christian Villarreal added, “We’re seeing a lot of different expansions, more money coming into the market. It is a learning opportunity for those in the [commercial real estate] industry.”
There have been a number of significant leases signed by cannabis users in recent months–the largest of which have been located in the Sacramento submarket. The largest lease was for 54,000 square feet at 8432 Rovana Circle. An additional 25,200 square feet was taken at 5 Wayne Court, and 24,000 square feet was spoken for at 8300 Alpine Ave. Lease rates ranged from $0.85 per square foot to as much as $1.75 per square foot, triple net, far above normal asking rates.
Colliers notes that post-legalization, rents for industrial spaces increased 38 percent through 2021, and that in the Sacramento area, starting rents for cannabis tenants can be “double and sometimes triple” that of traditional tenants. For retail properties, market rates increased by 19 percent, and across the Bay Area cannabis retailers can pay premiums anywhere between 25 percent to 50 percent more than market rate.
Bones stated that the higher prices are partially because of the time it takes to get approvals and conditional use permits from jurisdictions. Additionally, perceptions surrounding just how much cannabis businesses make, combined with the newness of the industry, contribute to higher prices.
“There’s really a perception–and I don’t think it’s entirely accurate–[landlords have] of what dispensaries are making,” he said. “They think they are making these huge profits…I think the reason for that is because you are going from a gray or black market to a regulated market.”
The rent premiums on retail and industrial space has prompted cannabis businesses to instead pursue buying property. In recent years, a number of smaller sales for buildings have taken place. Bay Area-wide, the largest property acquisitions by cannabis businesses range from about $392 per square foot to $585 per square foot in price.
“You’re more competitive if you’re controlling your costs,” said Bones. “You’re winning.”
However, as the industry grows, a number of challenges remain. Cannabis businesses often don’t have access to key financing critical for growth, and many landlords remain skeptical of hosting cannabis businesses in their own buildings. At the Federal level, possession of cannabis remains classified as a Schedule One drug, meaning possession is illegal.
“Financing is a struggle,” said Villarreal. “You cannot get institutional money; you cannot get FDIC insured money. None of the institutional lenders will look at cannabis.”
Colliers also notes that as many as 9 out of 10 landlords may not allow a cannabis tenant, and like institutional lenders, institutional landlords currently do not allow cannabis stores. Looking ahead, though, Colliers believes that the industry is likely to continue to grow, as other sources of funding encourage the growth of cannabis businesses. If ultimately legalized by the Federal government, a third “Green Rush” will likely be on the horizon; combined, all of these factors have implications for commercial real estate.