The cannabis industry is rapidly growing as more and more states are legalizing both medical marijuana usage and adult/recreational use. The rapid growth has led to an increase in demand for commercial properties, as cannabis companies need space for both their manufacturing and retail operations. Investors are now buying up commercial properties, such as warehouses and retail spaces, in cannabis-friendly states that have legalized recreational marijuana for three or more years.
Supply and (warehouse) demand
The strong need for commercial properties in cannabis-friendly states is increasing demand for warehouse space in 42 percent of the markets that have legalized its usage in the last three years. Markets that legalized recreational marijuana less than three years ago also saw a 34 percent increase in demand. However, these commercial properties can come with a large price tag, depending on location. States with higher barriers to entry make commercial real estate more valuable.
Cannabis is a cash business
Cannabis companies are at a disadvantage when it comes to buying or leasing commercial properties because they cannot make use of the resources provided by traditional banks. Most cannabis companies turn to private investors and specialized venture capitalists for monetary support because of this. The downside to this funding alternative is that cannabis companies are usually faced with high interest rates and tight restrictions from their investors. However, if the SAFE Banking Act is passed by the Senate, this will allow cannabis companies access to the services traditional financial institutions offer.
What does this mean for Arizona?
In 2010, Arizona passed Proposition 205, the Arizona Medical Marijuana Act (AMMA), which legalized medical marijuana for those over the age of 21. Arizona became the 14th state to legalize cannabis for medical purposes and according to the the Arizona Medical Marijuana Clinic, the newborn industry has created more than 4,680 full time jobs throughout Arizona. This number will continue to grow as investors are gaining significant interest in the industry.
Rules and Regulations
A few private real estate investment funds specializing in the cannabis industry, such as Kaylax Development and Innovative Properties Inc., are in the process of converting vacant Arizona warehouses into cannabis production facilities. The leading challenges that RE investors face are the legal rules and regulations that vary from state to state in relation to state and federal laws. Marijuana remains federally illegal, meaning that transactions done in the cannabis business must ALL be in cash. However, numbers don’t lie. The medical marijuana business has been highly beneficial to commercial real estate. The strict Arizona state zoning regulations are giving landowners an estimated three times the dollar amount per square-foot on properties being utilized for cannabis related businesses.
How will Arizona’s commercial real estate sector benefit?
The Arizona Marijuana Legalization Initiative or the “Smart and Safe Arizona Act” is predicted to be on the 2020 AZ ballot this November, enabling the recreational use of marijuana for adults 21 and older. If passed, it will increase the number of licenses to sell recreational marijuana from 130 to 170. As more cannabis businesses will be able to operate within the Arizona state lines, opportunities for commercial real estate will continue.
If you are a cannabis investor looking to find your next warehouse space contact our commercial real estate team at Landmark Title Assurance Agency. With more than four decades of industry experience we understand the challenges and nuances. To open an escrow or inquire about our service get in touch.