The legalization of marijuana will have an unprecedented impact on the collective U.S. national real estate market.
From the onset, the legalization of cannabis was a controversial subject. A large swath of the population was uncertain about the long-term viability of the industry, wary of its potential implosion due to criminal activity and rampant use amongst minors. The cannabis industry has since proven those initial doubters wrong and provided hard money lenders an opportunity to broaden their reach to even more borrowers.
While the federal government has yet to legalize marijuana use, to date, the recreational use of marijuana has been legalized in 15 states as well as Washington D.C. with several more poised to follow suit in the near future. For the most part, institutional lenders are not willing to provide loans secured by cannabis properties because the federal government is lagging behind these states in adopting a more lenient approach to cannabis regulation. This reluctance by institutional lenders means that the market is wide open for hard money lenders.
A study conducted by the National Association of Realtors (NAR) made it strikingly clear that legalization has a dramatic impact on local real estate markets—particularly in the commercial sector. In states where cannabis use has been legalized for over three years, the commercial real estate markets experienced a spike in the demand for warehouses to the tune of 42%. Storefront and land transactions also trended upwards by 27% and 21% respectively.
From a residential real estate perspective, marijuana legalization has had somewhat of a disparate effect. The NAR data indicates that in states where cannabis has been legal for the longest, 27% of the states saw a drop in residential property values for assets located in the vicinity of dispensaries while 12% of the states experienced an increase in home values. Property managers have responded accordingly, with somewhere between 58% to 67% of residential landlords moving to implement lease addendums banning the use of cannabis products on their premises.
According to a Social Science Research Network (SSRN) report, there was a 7% rate of appreciation in Colorado and Washington neighborhoods located near recently opened marijuana retailers. The SSRN statistics suggests that while homes in all price brackets experienced an increase in value, the legalization of cannabis has a distinguishable effect on higher-valued properties’ values when compared to lower-priced ones.
With the U.S. cannabis industry expected to eclipse $37 billion in sales within the next three years, it is apparent that it is no longer a niche market. Real estate markets in states where recreational marijuana has been completely legalized could potentially be more attractive to homebuyers as they offer opportunities for customers, business-minded investors and employees. As more and more cannabis dispensaries springing up around the country, there is a corresponding rise in the demand for workers and, as a result, housing options in areas where the cannabis industry is booming. A jump in property transactions and higher average rental prices in these areas could offer a significant boost to the local real estate markets.
A buyer preference for homes in the vicinity of dispensaries for convenience’s sake suggests that they are a growing amenity on homebuyer’s wish lists. In garnering increased revenue, cannabis legalization is becoming thought of as an emergent positive force in a sluggish economy—particularly in more rural areas. Legalization has also proven to considerably enhance municipal tax bases, offering funds for development and infrastructure that would be otherwise impossible.
Yet with all these associated benefits, for the real estate industry and beyond, it can be a challenging task for those in the real estate industry to actually realize a profit. When determining whether to invest in a project, hard money lenders should remember that a wide range of factors—from a municipality’s demographics and political leanings to its geographic location in relation to dispensaries—play a significant role as to whether a marijuana-themed real estate venture is successful.
While the future certainly looks promising, real estate opportunities associated with the cannabis industry are geographically dependent. With such a dynamic, emergent market, it is hard to accurately predict whether property values will continue to trend upwards or level off due to more widespread legalization. What can be said is that, thus far, it seems to be having a stimulating impact on the American real estate market—a welcome one for hard money lenders considering the tumultuous period we have experienced the last year.