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With major retail chains such as J.Crew and Pier One filing for bankruptcy and closing stores, landlords may finally be ready to warm up to the cannabis dispensary sector.
Historically, cannabis dispensaries have faced hurdles in finding their ideal retail space. A lot of this has to do with cultural stereotypes about cannabis, as well as the industry’s gray area of legality at the federal level. And it hasn’t helped that dispensaries operate in a business sector with little banking access. Whether because of these factors or others, many of the larger commercial brokers have little to do with renting their property sites to cannabis businesses of any kind — medical or adult-use.
Meanwhile, the COVID-19 pandemic has shuttered retail businesses in a way not seen since the Great Depression. With the possibility of large-scale retail vacancies on the horizon as restaurants, clothing stores and other businesses fail or cut back, now might be the time for landlords to take a closer look at the legal cannabis industry to fill these soon-to-be empty storefronts.
This is a business sector that has had no problem in paying its bills during the coronavirus pandemic, including the rent and taxes. Many experts predict that cannabis will be recession-proof, and both consumers and state governments have proclaimed retail cannabis as essential in the same way as grocery stores, fire departments and pharmacies. And while Wall Street has appeared to sour on many cannabis investments MJ, +0.29%, the overvaluation of cannabis stocks is reminiscent of the 2000 dot.com crash, which saw the actual consumer marketplace shift into overdrive just as investors bailed.
The coronavirus pandemic has illustrated how the cannabis economy is fundamentally different than what many landlords may have previously thought. Here are 5 reasons why landlords should rethink their views on this sector when they are considering who to take on as a tenant:
1. Cannabis businesses are essential. In the 33 states that legally regulate marijuana, long lines at cannabis dispensaries during the pandemic showed how strongly consumers view cannabis as vital to their well-being. Most governments at the state and local level took note. They ensured that retail cannabis operators were allowed to remain open because of their essential role in serving the health needs of communities. Even with the challenges of staffing with social-distancing, these businesses kept making sales from day one of the crisis.
From the perspective of any landlord, it’s probably apparent that these businesses were, and are, better able to cover their rent obligations than the untold thousands of other companies that have been forced closed since mid-March.
2. Government needs the tax revenue from legal cannabis businesses. Make no mistake: Even if the post-pandemic economic recovery were to take hold in earnest today, state governments could see a $200 billion shortfall in 2020. The businesses that continue to pay their taxes will be significant drivers of any economic recovery in cash-strapped states. Additionally, taxpaying companies are less likely to run afoul of IRS laws that could result in business closures (and, with them, missed rent payments).
3. Retail cannabis is a business sector with tremendous growth potential. Most landlords who already rent to cannabis companies know this is an emergent industry that faces a lot of regulatory and legal issues that differ from state to state. But it also is one in which sales of legal cannabis, which topped $12.2 billion in 2019, are forecast to hit an estimated $31 billion by 2024, according to The State of Legal Cannabis 2020 Update. In fact, the coronavirus pandemic brought a notable spike in cannabis sales, one that shows little indication of dissipating as the crisis continues.
4. Retail cannabis companies like big spaces. Cannabis dispensaries tend to favor large, open commercial spaces. Many retail cannabis dispensaries today are capable of supporting anchored retail sites from 1,500 square feet to a roomier (and costlier) 7,000 square feet in size.
A recent survey conducted by National Association of Realtors showed that states that regulate legal cannabis saw an increased demand of 18% for storefronts. However the same survey found a majority of commercial members were not currently leasing to marijuana-related businesses, making cannabis tenants some of the largest rental potential in the economy, with their numbers only expected to grow as legalization continues to spread.
5. Retail cannabis businesses are high-security, safe operations. Legal cannabis is produced, packaged and sold under the constant surveillance of security cameras and in secure buildings with armed guards. These visible safety measures make any site rental a more secure one, regardless of whether the location is for a cannabis dispensary or an agricultural operation. This safety can extend to the physical site and any other nearby tenants.
Today’s cannabis industry still has significant challenges involving banking access, zoning issues, insurance and so much more. All of these issues are of legitimate concern to any potential landlord gauging the risk of renting to a retail cannabis establishment. But the public perception of cannabis has undergone a remarkable change in recent years as both legalization and consumption have expanded. Cannabis is more widely — and properly — viewed as a beneficial health asset, not a mind-numbing vice or a Cheech & Chong punchline of yesterday.
As the world tries to regain its economic footing in the wake of the COVID-19 pandemic, landlords should take note and roll out the welcome mat accordingly. It will be profitable business for them, and it will be good for the nation’s economic recovery as well.
Joe Caltabiano was a co-founder of Cresco Labs, a Chicago-based publicly traded medical marijuana company, and its president from 2013 until he resigned in March. He previously was senior vice president of mortgage banking at Guaranteed Rate, a Chicago-based residential mortgage company.
