Cannabis Companies Benefit from Tumultuous Commercial Real Estate Market

Cannabis businesses, once struggling to find space for cultivation, manufacturing, and retail operations, are now benefiting from significant changes in the commercial real estate market. High interest rates, looming loan deadlines, and a surplus of vacant commercial spaces following the COVID-19 pandemic are prompting landlords to reconsider leasing to marijuana-related companies.

The U.S. commercial real estate market is facing unprecedented challenges, with an estimated $1.6 trillion in property financing expected to mature over the next two years, according to CoStar Group, a leading commercial real estate analytics firm. As of the first quarter of 2024, $35 billion in loans were past due or in nonaccrual status—the highest figure seen in over a decade, according to the Federal Deposit Insurance Corp. With many landlords struggling to fill vacant spaces, cannabis companies have become more attractive tenants, offering higher rent payments and a reliable business model.

Cannabis Companies Gain Access to Prime Retail Locations

One notable trend is the shift in leasing patterns, as cannabis companies now secure prime retail locations that were once inaccessible. Traditionally, marijuana businesses were relegated to secondary roads or industrial corridors, but this has changed in recent years. Cannabis multistate operators (MSOs) are now leasing more mainstream retail spaces, such as outparcels at major shopping centers or properties adjacent to retailers like Walmart.

Increased interest from MSOs stems from their willingness to pay higher rents and their ability to demonstrate financial stability. Real estate professionals note that landlords are increasingly comfortable leasing to these cannabis companies, thanks to the public availability of financial records and a growing understanding of the industry’s regulatory framework. This shift has made cannabis companies less of a leasing risk compared to a few years ago.

Overcoming Previous Leasing Hurdles

Historically, landlords were reluctant to lease to cannabis companies due to fears of civil forfeiture, where authorities could seize property suspected of being connected to illegal activity. These concerns have gradually diminished, especially as more states legalize cannabis and regulatory frameworks become clearer.

Now, many landlords are realizing that cannabis companies are viable, law-abiding tenants as long as they comply with state laws. Banks have also become more lenient, allowing cannabis companies to rent spaces without the same level of financial restrictions they once faced.

Even so, some misconceptions about the cannabis industry persist, particularly among landlords unfamiliar with the industry. However, education and dialogue have helped bridge this gap, with cannabis real estate consultants playing a key role in informing property owners about the financial stability of marijuana businesses.

Cannabis Real Estate in Mature Markets

In mature cannabis markets such as California, the relationship between landlords and cannabis businesses is evolving. Some landlords, having dealt with cannabis companies for decades, are more knowledgeable about the industry and are increasingly open to negotiating better leasing terms.

This shift has allowed cannabis real estate professionals to secure more favorable rates for their clients. By presenting clear financial data and case studies, these professionals can demonstrate the benefits of working with cannabis businesses, particularly in areas where cannabis companies have proven to be stable, high-paying tenants.

Impact of Federal Rescheduling on Cannabis Real Estate

Another major factor that could reshape the cannabis real estate market is the potential rescheduling of marijuana at the federal level. Currently classified as a Schedule 1 drug, cannabis is seen as having high potential for abuse and no medical value, which places significant financial and legal burdens on cannabis businesses. However, moving marijuana to Schedule 3 could dramatically change the landscape.

Rescheduling cannabis would reduce tax liabilities for cannabis operators, making them more attractive to investors. It would also open the door for more traditional lenders to enter the cannabis space, increasing access to capital for companies looking to lease or purchase real estate. As more traditional lending terms become available, more investors are expected to consider cannabis properties as a viable investment, thanks to favorable lease structures and higher capitalization rates.

The Future of Cannabis Real Estate

The cannabis real estate market is undergoing significant changes as landlords reconsider the potential of leasing to cannabis businesses. With a glut of commercial properties and rising financial pressures, property owners are more open than ever to working with cannabis companies. These businesses, in turn, are benefiting from access to prime retail spaces and improved leasing terms.

As the industry continues to grow and evolve, further developments—such as federal rescheduling—could unlock even more opportunities for cannabis companies and investors alike. However, experts caution that it will take time for the full impact of these changes to materialize, with many predicting that the next 12 to 18 months will provide the data needed to assess the true potential of cannabis real estate.