Real Estate Squeeze Threatens D.C.'s Growing Legal Cannabis Market

In a nondescript brick warehouse at the end of an industrial-lined road in D.C.’s Takoma neighborhood, thousands of cannabis plants are in various stages of bloom.

The cultivation manufacturing center opened in January, the result of an eight-year search to find a location and a yearlong build-out. Less than half of the 65K SF space has been completed, and the full build-out is projected to total $20M. 

“We've been a long time in the making for this, and we're hoping it all pays off,” said AltSol owner Matt Lawson-Baker, standing just inside the chain-link fence that guards the facility.

The warehouse is one of just eight cultivation centers in the city, supplying the 67 open regulated retailers and nine processing facilities in D.C.’s newly expanded cannabis market. 

D.C. opened up its cannabis market in 2023, allowing residents and visitors to self-certify for medical licenses, a move that has led the number of registered patients to more than quadruple over the last three years. At the same time, the city lifted the limits on cultivators, manufacturers and retailers, ushering in an era of a vastly expanded regulated market.

In this new landscape, all cannabis sold in D.C. must also be grown and processed in the city, meaning local retailers are dependent on the city’s ability to house enough cultivators and manufacturers. 

And as more cannabis shops open, there is growing concern about the ability of D.C.’s small industrial footprint to support the expanding market.

A city spokesperson tells Bisnow another 340 retail cannabis businesses and 51 manufacturing businesses — where grown plants are processed into sellable products — have received conditional approval and are looking for real estate.

“That was always something that they talked about when we actually made the transition,” said Lisa Scott, the founding board member of the District of Columbia Cannabis Business Association. “They were worried there wouldn't be enough supply for the demand, and that's actually sort of what's happening right now.”

Finding space is particularly challenging in D.C. due to its dense, high-rent urban environment, whereas states like neighboring Maryland, which has legalized cannabis, have far more real estate that can support cannabis growing. But some of the issues businesses face are seen across the country: corporate industrial owners with bank loans on their properties are hesitant to lease to cannabis companies while it remains illegal at the federal level. 

AltSol began searching for its newest facility a decade ago — a big head start on some of the cultivators that are trying to open now to supply the new wave of regulated businesses. Lawson-Baker told Bisnow he now sees his peers battling to find real estate.

“It’s a nightmare,” Lawson-Baker said. “They’re all struggling. It’s very difficult to find.”

With few available spaces for growers and processors, the supply side of the equation is starting to see some strain, according to sources involved in the D.C. cannabis landscape.

Cannabis attorneys John McGowan and Meredith Kinner of Kinner & McGowan told Bisnow they’ve heard “growing concerns” from retailers and manufacturers over the past few months about being able to source the cannabis plants they need.

“They may want a certain amount of flower for their inventory but if they place an order for that, they may not be able to fulfill that order,” McGowan said.

AltSol has a second 20K SF location in Ward 5 along Bladensburg Road that it opened in 2015, and between the two, it supplies products to every licensed dispensary in the city, according to a company spokesperson. It opens online ordering for its stock once a week and sells out within an hour.

The second phase of its Takoma facility is expected to add around nine more flower rooms to the current three.

“We know we've got to hurry up and get more grow rooms online, get more production in to keep the momentum of the market growth,” Lawson-Baker said.

There are now 61 cultivators and 51 manufacturers with conditional licenses, according to D.C.'s Alcoholic Beverage and Cannabis Administration. Those businesses have two years to find space and get approval to start operations before their permission is revoked.

“I'm sure there's many that have given up trying to find a location,” Scott said. 

D.C. has so little industrial space that two brokerages, Cushman & Wakefield and CBRE, both told Bisnow they don't track its inventory. JLL measures the industrial space in the city to be just short of 10M SF, with 90% of the inventory constructed before 1970. Neighboring Prince George's County, Maryland, has four times as much industrial space as the District. 

“It is a very small industrial market, and the supply has shrunk over time and will likely continue to do so,” said Cushman & Wakefield Executive Director Jon Lawrence, who specializes in flex and industrial sales and leasing in the region. 

Cannabis cultivators and manufacturers don’t necessarily need industrial space, but they do need to be in certain zones.

“Cultivation and manufacturing — the zoning is very, very limited,” Scott said. “So it's been difficult to create enough supply for the demand.”

Manufacturers who require industrial processing equipment are limited to Production, Distribution and Repair zones. Those zones make up 5.2% of D.C.’s total land area, according to the Department of Buildings.

Cultivators and manufacturers who use household equipment like ovens can also locate in zones where light manufacturing is permitted, which includes a small portion of mixed-use zones and some downtown zones. Office space can work for these types of manufacturers, but it tends to cost more.

Some manufacturing businesses are upset they are limited to that designation, given that they are essentially no more than a bakery, said Kinner. 

“There's a lot of just discontent among people who haven't found locations because why wouldn't they be in the same zone as a restaurant, which can be in any mixed-use zone,” she said. “So zoning’s a big issue.”

But even within those zones, the options are limited. Most landlords won’t touch cannabis tenants. Many are hamstrung by mortgages. Because cannabis isn’t federally legal, landlords that have mortgages with major banks aren’t likely to be permitted to rent to cannabis tenants, experts told Bisnow. 

“What kind of mortgage does the owner have? Is it backed by the federal government? Because if it is, they're probably not going to rent to a cannabis licensee,” Kinner said.

The D.C. Council is reviewing legislation to allow retailers to also be able to manufacture products like edibles, oils, butters, lotions, ointments and pre-rolls, opening up the available real estate for those types of production.

The owners of Pink Fox, an edibles manufacturer, searched for nine months to find a space to bake pot gummies, pretzels, cheese crackers and cookies.

“We looked at 100 different sites, honestly,” Pink Fox CEO Mark Nagib said. “We called 100 more that didn't call us back or wouldn't let us look at it. I must have engaged with five, six different commercial real estate agents.”

The business finally opened at the end of December, taking just over 1K SF at the former Ari’s Diner space at the Hecht Warehouse in Ivy City. It had all the bones for a cannabis bakery, from the walk-in fridge to the dishwashing station.

Nagib said he hasn’t had a problem sourcing the distillate from cannabis plants that he needs to make his edibles, but he expects the cultivation side to get increasingly strained.

“Cultivation is going to continue to be a huge issue in D.C. for a number of reasons,” he said, particularly because of the city's small footprint. “We don't really have facilities that allow for that.”

Because space is so hard to come by, landlords know they have the leverage, Nagib said. So even when a business finds a space, there’s an additional price to pay if you’re a cannabis business. 

“There's a saying amongst cannabis operators and licensees: anywhere you go, you get the cannabis tax,” Nagib said. “They charge you X amount more than the normal business because they know your hands are tied.”

Scott looked for a location for her newly regulated cannabis retailer, Bud Appetit, for over a year. 

“There aren't that many spaces that are available and affordable,” she said.

In the meantime, DCCBA is recommending that businesses team up to share a footprint. A space that might be too big or too expensive for one business to handle could work for two.

“Maybe you find a partner, put together, you know, put your merger, conditional licenses into one, and maybe you can find something that you can afford together,” Scott said. 

As conditional licensees face looming deadlines, Kinner and McGowan said they expect businesses to get more creative as their hands will be forced to find real estate or lose their license. 

They have seen some manufacturers who don’t use the heavy processing equipment take office space. Scott knows of one that built a kitchen from scratch inside an office space downtown.

“As deadlines approach on some of these conditional licenses and things become scarce, I think people will start thinking outside the box,” McGowan said.