Medical Marijuana Space Delivers Above Average Yield for Net Lease Investors

While there is a learning curve as the medical-marijuana net leased asset niche continues to evolve, there are some investors looking to get in on the ground floor of ownership.  Leases on these assets are attractive as they usually present minimal landlord expense responsibilities and feature 10 or more years of term with annual increases. 

What can’t be ignored is the fact that the legal cannabis market grew about 45 percent in 2020 and US cannabinoid sales are expected to top $24 billion in 2021 according to BDSA, a top cannabis market research firm. Over the last year, our SRS team has sold several properties occupied by medical marijuana tenants—examples include Curaleaf, Trulieve, Fluent (Cansortium), etc—and we have three others currently in escrow. When marketing these assets, what many of the potential buyers are surprised to learn is that for the most part, retail operators in the cannabis industry are sophisticated companies with in excess of 100 retail locations—and some are publicly traded on the Canadian stock exchange.

When it comes to laws and legislation, they vary state-by-state regarding the sale of cannabis for medical use, recreational use, or not at all. However, one thing we know for sure is that COVID has had a positive effect on this industry, with a lot of states deeming medical marijuana an essential business.  The pandemic also accelerated the adoption of telehealth services, online ordering and delivery/curbside pickup.  

With the addition of a few in the recent election, 36 states have now approved measures to regulate cannabis for medical and/or recreational use.  Some states that have legalized marijuana for recreational (adult-use) purposes are California, Colorado, Nevada, and Massachusetts, among others.  Other states like Florida, Pennsylvania, and New York are still medical-only, but are likely to see some measures put forward for recreational use in the near future.

What is certain is that this industry is rapidly evolving and all signs seem to be pointing to positive legislation trends. As a result, more CRE investors are embracing the sector as their comfort level increases. While medical cannabis properties currently offer an above-market yield, I believe we will start to see cap rates compress as financing becomes more readily available and regulations are relaxed.  We have also seen (and expect to see more) M&A activity in this space as some of the smaller operators are getting absorbed by larger groups which could provide a big enhancement to the credit on the lease. 

As I mentioned above, the debt markets seem to be opening up for these types of properties.  More lenders are willing to take a look at retail strips if the medical marijuana user is less than 50 percent of the tenancy (those terms are close to their tenancy requirements with traditional retailers as well).  For freestanding single-tenant properties, we’ve seen some traditional lenders become interested with adjustments to the LTV and interest rate.

Ultimately, we can expect to see the medical marijuana industry grow over the coming years as it becomes more mainstream. I also believe we will see the buyer pool grow for this asset type from largely opportunistic investors to more traditional and institutional investors seeking a stabilized property run by experienced operators.

Will Wamble is first vice president of SRS Real Estate Partners’ National Net Lease Group.