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From Illicit To Essential: Pandemic Helping Cannabis Industry Gain Firmer Footing

When the economy went into a steep decline last spring, many cannabis retailers and growers said their industry was at risk. The federal prohibition on cannabis already made it difficult to raise needed capital, and with millions of jobs evaporating, legal sales could also crater, leading risk-averse investors to back off even further.

Their worst fears did not come true.

“It turned out to be the total opposite,” according to Richard Acosta, CEO of Beverly Hills, California-based Inception REIT, and Subversive Real Estate Acquisition REIT, which invest in cannabis real estate assets.


Homebound consumers bought growing amounts of legal cannabis throughout the coronavirus pandemic, rather than cheaper product on the black market. Investors also seem willing to pour in capital. Best of all, industry leaders said, this fall's elections could bring about the legalization of cannabis in several additional states.

“It’s really one of the few growing areas of the U.S. economy,” Acosta said.

The industry got a big boost from the decisions by most states with legal cannabis to consider it an essential business, similar to groceries, pharmacies, convenience stores and others, he added.

“That was a real validation," Acosta said. "People can say, ‘This is federally prohibited,’ but it’s also protected at a state and local level, and that really raised some eyebrows.”

Illinois Gov. J.B. Pritzker signed the bill legalizing recreational cannabis in 2019, and dispensaries opened for business on Jan. 1. Sales of 972K items totaled $39.2M that first month, and steadily grew as the state’s shutdown orders kept anxiety-ridden consumers isolated at home, according to the Illinois Department of Professional and Financial Regulation.

“Marijuana has gone from illicit to essential,” WBS Equities CEO Wendy Berger said. She is also a board member of Chicago-based Green Thumb Industries, which cultivates marijuana and operates cannabis dispensaries nationwide.

“Millennials view marijuana as less harmful than alcohol, so there is a tidal wave of demand looming,” Berger added. “We were able to open six more stores so far during the pandemic.”

By May, recreational users bought $44.3M of cannabis products, including cannabis flower or concentrate, edibles and beverages. Last month consumers set a new Illinois record, with more than $60M in sales on about 1.3 million items.   

Other states saw similar numbers. California’s sales in July rose to $348M, the most of any month since it legalized cannabis use in January 2018, according to Headset, a Seattle-based firm that tracks marijuana sales. Nationally, after some ups and downs in March and April, daily sales have been averaging about 40% higher than in 2019, according to The State of the Cannabis Industry 2020, a report by cannabis firms Vangst, LealLink and Flowhub.

“We believe the black market’s ceding a lot of market share to legally produced cannabis,” Acosta said.

Cresco's cannabis facility in Lincoln, Ill.

That’s partly because cannabis retailers made it easy for buyers, he added. Although stores in many states had to abide by strict social-distancing rules, dispensaries responded by introducing order-ahead options, whether through e-commerce solutions, curbside pickup or delivery.

Vangst surveyed retailers for the cannabis industry report and found 79% introduced curbside pickup or other delivery models as COVID-19 fears shut down much of the retail sector. Those dispensaries outperformed their peers, researchers found.

“For example, on Thursday, April 2, average daily recreational sales were 27% higher for dispensaries with order ahead in Colorado and 18% higher for dispensaries with order ahead in California,” according to the report.

The booming business means cannabis tenants, unlike many other retailers, can pay the rent.

Innovative Industrial Properties, a San Diego-based REIT, owns 61 properties in 16 states totaling 4.5M SF, mostly leased to cannabis operators. Aside from one Los Angeles property, its tenants paid 100% of the due rent for the months of April, May, June and July, Executive Chairman Alan Gold said on a Q2 earnings call on Aug. 6.

Even though cannabis has proven to be a lucrative product, the investment climate for cultivators and retailers is far from perfect, Berger said. The federal prohibition, which keeps most banks and other traditional lenders out of the space, essentially means already-big players can raise the necessary funds to expand operations and buy up smaller competitors.

Multi-state operator Curaleaf continued the recent spate of cannabis industry mergers by closing its $700M acquisition of Chicago-based Grassroots in July. The new combination now has operations in 23 states, with about 135 dispensary licenses, 88 retail stores, 22 cultivation sites and more than 30 processing facilities, Curaleaf officials said.  

Smaller operators may not reach their full potential until the product is legal and they can attract more investment, Berger added. Currently, many operators depend on sale-leasebacks of their properties to raise capital. Large family offices, special venture capital funds and high net worth individuals are also important sources of capital. But attracting funds from banks, hedge funds and the traditional venture capital funds will have to wait.

“We are not going to see really big checks until institutions feel comfortable taking part in a business that the federal government still considers illegal,” she said.

WBS Equities CEO Wendy Berger

The legal landscape for cannabis may also be on the verge of major change, Berger added. Cannabis-related businesses produce jobs and tax revenue, and the economic crisis has many states hungry for both.

“All of the states need tax revenue at this moment,” she said.

In Illinois, cannabis operations paid the state about $66M in taxes through the end of July, according to state officials.

“That’s a big number, and even though it won’t solve anyone’s budget problem alone, where else are you seeing new tax dollars come in?” she said.

So far 11 states and Washington, D.C., have legalized recreational marijuana, and 22 states allow the sale of medical marijuana. Voter referendums on legalizing marijuana will be held this year in several more states, including Arizona, Montana, South Dakota and New Jersey. The New Jersey referendum is being closely watched, Berger said, because a successful vote could help open up much of the Northeast to legal recreational cannabis.

“Once you see New Jersey go adult use, New York and Connecticut will probably move, because they won’t want to see their residents cross the bridges and go through tunnels to buy their marijuana in New Jersey, and send their tax dollars there.”  

So far, cannabis advocates in the state seem to have the upper hand. A July poll by DKC Analytics found 68% of likely voters supported the measure.   

No one should expect a nationwide legalization of cannabis use in the near future, Acosta said. Getting legalization bills through state legislatures can take several years as stakeholders negotiate and argue over the regulations that will govern the product’s sale. Creating a federal program would be even more complex.

The Democratic National Committee has already voted down a proposal to make full-scale national legalization part of the party’s plank, according to an Aug. 12 report by Marijuana Moment.

But pro-marijuana advocates see some hope in Democratic presidential nominee Joe Biden’s selection of U.S. Sen. Kamala Harris as his running mate. The California senator last year introduced the Marijuana Opportunity Reinvestment and Expungement Act, which if approved, would decriminalize marijuana, and allow people convicted of some marijuana-related offenses to expunge their convictions.

Allowing state-by-state referendums to keep rolling forward, while trying to at least decriminalize cannabis use on the federal level as a first step, would be an easier path than full-scale legalization, Acosta said.

“That’s a longer national conversation, but we can start with baby steps,” he said.