What Will the Cannabis Market Look Like in 12 Months?

The cannabis real estate investment market has emerged quickly, but it is still in its infancy. Commercial real estate investment interest is expected to grow—but a lot will depend on cities to clarify and iron out and bumps in the regulatory process. For now, many investors are waiting on the sidelines, and California cities could determine the long-term viability of the potentially substantial niche investment market.

“We expect interest to remain high, and for regulatory processes to normalize and become more predictable,” Seth Weissman, a partner at Jeffer Mangels Butler & Mitchell, tells GlobeSt.com. “Much depends on each city’s comfort with cannabis and the number of operations that they will permit in their city.  Long-term growth will depend, in part, on the size of the cannabis user market and potential deregulation at the federal level.”

Legalization at the federal level could also play a role in the viability of cannabis real estate as an investment class, particularly in the short-term. “If cannabis operations are permitted in all 50 states, and product can be distributed across state lines, that would have enormous market impact,” says Weissman. “As regulations ease, we may see over-supply, which will reduce product prices and ultimately profits. That, in turn, could reduce demand for cannabis real estate, reducing rents to more general, market-driven levels.”

Weissman’s advice to investors looking to enter the market: be smart. It is easy to think that the market is a goldmine. “Don’t be fooled into thinking that this is a quick-money, easy return business,” he says. “Understand all of the permitting regulations in each applicable jurisdiction; do not rely on what the operators/tenants or their lawyers tell you; do your own homework; invest in counsel that has done more than a handful of deals and ask them about the pitfalls. If someone sets out a business plan that requires the property owner to be involved in the permitting, understand that your name will be associated with cannabis, which is still illegal at the federal level.”

In addition to understanding the business and the market, this is also an industry where tenant scrutiny is a must. “Make sure that your tenants are willing to fully abide by all applicable laws and regulations,” says Weissman. “Incorporate these requirements in lease documents, and enforce them. Landlords that allow their tenants to knowingly violate applicable legal requirements run the risk of enforcement actions by state and local officials, including suspension of tenant operations. There is even risk of federal property forfeiture.”