The cannabis industry is weathering the COVID-19 pandemic much better than expected and is even thriving in some states like California that declared cannabis sellers an “essential” business, reports Marijuana Business Daily.
Tim McGraw, a cannabis real estate developer/owner who founded and serves as CEO of Canna-Hub, a firm that specializes in cannabis-zoned real estate development, says that site visits to his firm’s 1.2-million-sq.-ft. cannabis business park in Williams, Calif., slowed during the lockdown, but now, cannabis real estate may be second only to the industrial sector for capital investment.
“While the world is on fire, people are smoking more cannabis,” says McGraw, noting that the pandemic and lockdown elevated people’s stress levels to an all-time high, and cannabis “helps with that.”
An American Marijuana survey of 990 pot consumers verified McGraw’s contention, finding that 48 percent of participants stocked up on marijuana products amid the pandemic and 55 percent said they did it to help with stress.
BDS Analytics data also confirmed the premise, finding that cannabis dispensaries are seeing double-digit increases in sales, even after the $600 expanded federal unemployment benefit expired this summer. This is a trend that’s likely to continue after COVID-19 is long gone, according to Marijuana Business Daily.
However, there has been a lot of confusion among investors, especially at the start of the pandemic, because some states, classified cannabis an “essential” business, but others did not, notes Eric Altstadter, the lead partner with the accounting firm EisnerAmper’s cannabis practice. This was compounded by some states declaring medical cannabis “essential,” while recreational cannabis was not, he adds.
With pot now legal for recreational use in 11 and medical use in 33 states, cannabis is currently at $9.3 billion industry, according to Medical Marijuana Inc., which predicts that sales could grow to an estimated $30 million by 2025.
Going forward, the economic impact of cannabis sales on state and local governments may accelerate legalization of cannabis in more states, according to Altstadter. “Speculators and entrepreneurs are starting to prepare for possible legalization of medicinal or recreational cannabis, or both, in six states expected to vote on this issue in the coming months, including Arizona, Mississippi, Montana, Nebraska, New Jersey and South Dakota,” he notes. McGraw adds Missouri, Vermont and Florida to the list, and says that Massachusetts is expected to open up more medical licenses and legalize it for recreational use.
“Cannabis has remained remarkably resilience through the pandemic, with better than expected sales growth in most markets,” agrees Matthew Karnes, CPA and founder of Greenwave Advisors, a New York-based cannabis research and advisory firm. But he warns, “As the economy continues to worsen, we remain cautious that these trends are sustainable.”
Heightened levels of anxiety and health concerns, in addition to the financial assault brought about by the COVID-19 pandemic, have arguably enhanced the cannabis legalization debate, Karnes notes. And to minimize budget shortfalls, it stands to reason that many states that are not already generating tax revenues from cannabis sales will now seek to address the prospect of legalization.
Practically speaking, it takes two years or more for a state to establish a cannabis market, but due to the need to increase revenue states may accelerate this timeline if medical marijuana is already legal there, he notes. Karnes cites, for example, New Jersey, which recently expanded and positioned its medical marijuana program so at the “flick of the switch” it could realize added tax revenue from recreational use sales if the measure passes in November as expected.
But the positive sentiment toward cannabis legalization isn’t translating into real estate investment activity, notes Jim Fitzpatrick, principal at Costa Mesa, Calif.-based Solutioneers, a consulting firm that helps real estate investors identify cannabis-compliant properties and obtain financing, who notes that economic uncertainty and other factors unique to the cannabis industry are negatively impacting real estate investment. As a result of the COVID-19 induced recession, Fitzpatrick notes that the U.S. capital market is highly constricted, but the high cost of occupancy (taxes plus rent) for cannabis tenants is also stifling investment activity.
Noting that Canada is still seeing cannabis real estate investment, while comparable U.S. figures remain flat, he contends that high taxes on cannabis recreational products are having a major impact on both the viability of legal cannabis production and real estate investment in cannabis-related assets. McGraw says he located his cannabis business park in an Opportunity Zone in Williams, Calif., which has no local or revenue tax, for this very reason. “This is a substantial competitive business advantage for our tenants as it lowers their overhead and increases margins for investors,” he says, noting that the average local or county tax in California is 7.6 percent, but can be as high as 25.0 percent.
“Cities are trying to fix their revenue shortfalls on the backs of cannabis businesses,” Fitzpatrick notes, explaining that high taxes, along with rent premiums in “green zones,” are driving the cost of recreational cannabis products to levels unacceptable to consumers. As a result, cannabis recreational users are returning to the illicit market or obtaining medical marijuana cards, because medical cannabis products aren’t taxed or are taxed at a much lower level.
On the other hand, Karnes suggests that a worsening economy may cause tax revenue to fall short of projections, as cannabis consumers switch to the illicit market or obtain a medical card because sales taxes are lower for medical marijuana than for cannabis sold for recreational use.
Meanwhile, the COVID-19 pandemic will weed out cash-strapped, underperformers from successful, well-funded cannabis companies, according to Altstadter. He notes that since marijuana is still a Schedule 1 drug under federal law, cannabis businesses are not eligible for the federal Paycheck Protection Program loans. Companies without cash reserves, therefore, are unable to meet their expenses and will be forced to seek an exit strategy.
In addition, Fitzpatrick warns that premium rents that landlords charged cannabis businesses pre-pademic are no longer viable in the current market. Even without COVID-19’s influence, he notes that operators were beginning to renegotiate leases because they realized that what they signed up for three or four years ago is no longer sustainable under the current tax burden.
Post-COVID-19, Altstadter forecasts there will be a thinning of the industry, as companies with good management and good fundamentals survive and thrive and buy real estate, while others will be acquired through M&A transactions or just cease to exist.
“The complexities of the U.S. cannabis industry have been exacerbated by the consequences of states operating within the confines of closed economies defined by their own interpretations of legitimacy under the shadow of existing federal laws,” adds Karnes. “Variations in standards from one state to another carry inherent uncertainties for businesses and investors with respect to how the industry will operate subsequent to the inevitable delisting or reclassification of cannabis.”
Karnes suggests that the post-COVID-19 economic environment will make cannabis real estate investors cautious, even if business remains stable. “I think REITs will continue to attract investors post-COVID, because capital is likely to be scarce for some time, even after the pandemic is no longer a concern,” he says.
Additionally, he expects that institutional investors that had shunned cannabis real estate in the past because it is illegal under federal law will get onboard. “As we get to the end of prohibition, investors that would not ordinarily invest in this space may start to take interest,” he notes. COVID-19 may also change how consumers buy marijuana, as similar to online grocery sales, it has accelerated shopper movement to online cannabis sales.
Cannabis companies began offering e-commerce solutions primarily as a result of certain states loosening their regulations with respect to cannabis delivery, says Altstadter. McGraw suggests that this was in response to lockdown rules that require retailers to limit the number of customers inside dispensaries at any one time, which created long shopper queues. He expects some shoppers to return to bricks-and-mortar dispensaries when the pandemic is over.
Richard Acosta, CEO and managing partner of Beverly Hills, Calif.-based Inception Real Estate Investment Trust or I-REIT, suggested in an ICSC interview recently that similar to online grocery sales, cannabis e-commerce will have an enduring impact on the businesses, which are quickly building out delivery and pick-up services to accommodate customer preferences and convenience.
Additionally, cannabis’ stellar performance during the current economic crisis may cause mainstream commercial real estate landlords that have avoided cannabis tenants in the past to welcome them. Acosta told ICSC that landlords are likely to view the cannabis industry more favorably as it continues to show recession-proof qualities and stability as a tenant base, and there will be wide adoption by retail landlords looking for a way to generate foot traffic and fill vacant spaces.
McGraw says that landlords absolutely will be accepting of cannabis tenants post-COVID-19: “They can pay their rent and are willing to pay a rent premium for the right location.”