A New Frontier For CRE: Cannabis Brokers Work To Corner The Market Before The Big Names Make A Move
Cannabis is a new frontier for real estate, a kind of Wild West, with danger lurking but money to be made, and that has led many brokers and real estate professionals to at least consider what it would be like to get into the cannabis business. Experts caution, however, that much like the actual frontier era, it’s a marketplace that’s challenging, not for everyone and prone to rapid shifts, even while the opportunity remains.
“One of the No. 1 things we get asked about is how can I get involved in cannabis real estate,” said Ryan George, the founder of 420Property.com, an online platform for buying and selling industrial and commercial property connected to the industry. “It’s something agents can focus on and make more of a premium on.”
With well-populated states such as New York and New Jersey recently legalizing the use of cannabis, investors are getting their “war chests” ready, George said, waiting for each state to release their new regulations and then make big bets on real estate.
Gregory Tannor is a principal at Lee & Associates NYC, and has jumped on cannabis real estate and signed up roughly 200 locations for dispensaries.
“I stayed up the night the state Assembly passed the legalization bill, and when it passed in the middle of the night, woke up my wife, kissed her, and said, 'I’ll see you in three to five years.'”
The rush is on with industrial real estate, too, especially due to the competition for good space with e-commerce companies.
“In our opinion, there’s only great locations,” Tannor said. “It’s a land grab to lock in these positions in these submarkets, as many as you can, to plant your flag and push out other competitors.”
If that’s not enough of an opportunity, due to financial regulations that keep big banks from working with the industry, there is an opening for independent brokers to corner the market before the largest real estate services firms in the world, like CBRE and JLL, can make their moves.
“Real estate is at the crux of the licensing process, so that’s why it’s integral and tied in with cannabis, you can’t do anything without real estate,” said Peter Padden, a senior associate at LA-based James Capital Advisors, which opened up a division devoted to cannabis real estate in March. “It’s easy to get caught up — there’s still that illicit, ‘it’s naughty’ vibe — and really easy to get doe-eyed with someone who’s spitting game and they’re just not a good client. The biggest lesson I learned is how to pick good deals and clients from the bad ones.”
Knowing ordinances and understanding timing of licensing, and different stages of licensing, is key, and needs to be taken into consideration, James Capital Vice President Korena Ellis said. Despite the hype around the industry’s growth, there aren’t many specialized brokers out there.
Oftentimes, deals in the space have been done by residential or commercial brokers with just a passing experience in the industry’s regulatory framework. George said there are just a few dozen agents across the country who are specialized and doing well, versus roughly a few hundred who have tried and failed to carve out that niche. He believes it’s the Pareto principle at work; 80% of business goes to 20% of agents.
George said that the brokers he’s seen who have been successful have operational knowledge of the industry and transferred over from the cannabis industry into real estate. Selling industrial properties for growers isn’t just about knowing the regulations — they need proper ceiling heights, electrical hookups, additional buildings with fire suppression systems.
“It’s like learning a whole new skill set,” George said. “It all comes down to how much resilience somebody has. Deals are harder to get done than, say, regular, bread-and-butter industrial deals. There’s a lot more red tape. I don’t encourage people or discourage people. If somebody came to me saying I’m only doing it for quick and easy money, I’d say don’t even try.”
Part of that knowledge includes understanding how to structure leases that work for all parties in this heavily regulated industry. Due to the time it takes to obtain licenses and the need to have a space before applying, it’s important to build in hold fees to the transaction.
Tannor said that in Massachusetts, for example, some potential operators paid rent for years as they waited for their licenses, which can often push competitors out of business due to the wait. The James Capital team structures its payments upfront for this exact reason. It’s also key to structure leases with clauses that don’t allow licenses to be transferred.
For James Capital, the long-term play is working in mature markets. The company plans to focus on net lease, and move away from emerging markets. A property fully leased to cannabis tenants becomes an income stream for someone who buys it, as opposed to buying a speculative property for someone to lease to an operator.
“Am I going to find cannabis at a grocery store in 10 years?” Padden said. “I think cannabis will always be regulated to a certain degree and require specialist knowledge. If anything, I see our job getting easier as time goes on, as there will be a greater acceptance of investors and landlords. When the banking thing goes away, we’ll see apothecariums in major strip centers next to big-box stores.”