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What the Business of Cannabis May Mean for Real Estate

Ryan Dolan and Travis Ludden

6.3.21 | Industry Insights

In the early hours of March 31, New York Governor Andrew Cuomo signed a bill passed by the state legislature legalizing the recreational use of marijuana. To many, the push toward legalization was driven in large part by public policy considerations. However, the implications with regard to the wider economy and the commercial real estate sector, in particular, should not be overlooked.

As of May 2021, 36 states have legalized cannabis for medicinal purposes, and 18 states have legalized it for recreational use. These developments include New York, which has voted to legalize recreational use; however, the details of the rollout are not yet defined, and sales of recreational marijuana are expected to be a year away. The numbers touted by Cuomo’s office are significant. The state estimates that the legalization measure could bring in up to 60,000 jobs and add up to $350 million a year to the state coffers. Not to harsh anyone’s mellow, but legal weed will be heavily taxed. Right now, you can only use marijuana legally but not sell it. Once sales in New York State become legalized, there will be a combined 13% tax rate comprised of a 9% state tax and a 4% local tax. In Colorado, the marijuana industry, which was legalized in 2014 and had annual sales of $683,000 in 2014, has grown to $2.2 billion in 2020. Colorado tax revenue has increased each year since legalization in 2014 from approximately $67 million in 2014 to $387 million in 2020. Sales are expected to continue to grow, with $143 million already generated as of April 2021.

Implications for Commercial Real Estate

Legalizing cannabis has made marijuana big business and has had a concomitant effect on the commercial real estate market. By 2016, according to a study by the Kansas City Federal Reserve, marijuana businesses occupied 14.2 million square feet of industrial warehouse space in Denver alone. Does a similar fate await New York’s commercial real estate sector? Not in the immediate future, since recreational marijuana sales are not expected for another year or two. But that hasn’t stopped some from getting an early jump on what will no doubt be an extremely lucrative market. In a recent study done by MPG Consulting for the New York Cannabis Industry Association, legal cannabis sales in New York are expected to be $1.2 billion by 2023, increasing to an estimated $4.2 billion by 2027. The report also estimates that there will be 900 cannabis retail outlets by 2027 with an estimated 2.5m square feet of canopy to meet the expected demand.

The timing of New York’s legalization measure is propitious given the beating that brick and mortar retail has taken over the past year. Expectations are that cannabis dispensaries, vape stores, and pot cafes will help fill the vacuum left in the wake of COVID-19. Overseeing the legalization effort will fall to the newly created Office of Cannabis Management, which will handle licensing and regulation. Its role will be similar to that played by the New York Liquor Authority with regard to the selling of alcohol in bars and restaurants.

The Record Speaks for Itself

The history of legalization in other states is tantalizing: Where legalization has been enacted, growth has been nothing short of exponential. According to the Wall Street Journal, first quarter cannabis sales for 2021 in Illinois and Florida compared to 2020 have increased between 90% and 100%, with total sales of recreational marijuana in the U.S. increasing from $13 billion in 2019 to $20 billion in 2020.

Commercial real estate investors in New York believe legalization will be a much-needed lifeline to struggling mom and pop retail landlords. Greg Tannor, a principal and executive managing director at commercial real estate brokerage Lee & Associates NYC, told The Real Deal that “It’s a feeding frenzy right now because of the vacancy rate in the city.”

Caution Amid the Frenzy

Although there are clearly positives to the legalization of marijuana in New York, there are still things to keep in mind amid all the optimism. At the federal level, marijuana is still illegal, so properties that have federally chartered mortgages and loans will not be able to partake, as it were. There are also issues of zoning to consider. As with tobacco, the newly signed New York legislation prohibits the sale of marijuana within 500 feet of a school or church. Rules will also differ from town to town as localities have considerable leeway in enacting zoning regulations.

Legal cannabis presents an opportunity to those who are not averse to the risks of jumping into an industry that is technically still not legal at the federal level. As such, there are still banking restrictions for cannabis companies; however, the cost of capital is seemingly coming down as more states legalize the use of recreational marijuana, and investors are champing at the bit to get their foot in the door of a burgeoning industry.

Questions: Contact Travis Ludden at 212.331.7494 | tludden@berdon.com or reach out to your Berdon advisor.