• Wed. Apr 14th, 2021

The Effects Of Marijuana Legalization On American Real Estate

Aviva is the Managing Broker of Sonenreich & Co, a third-generation commercial real estate broker, owner and investor in Denver, Colorado.

When America’s real estate history is written, there will be a chapter with the legalization of marijuana as a focal point. I’m a third-generation warehouse owner in Denver, in the state that recreational marijuana was first legalized in, so it’s impossible for me to not be compelled to analyze the spillover effects. 

In the beginning, legalization was a contentious point. Many were suspicious about the product’s future and considered it a ticking time bomb with concerns revolving around crime rates and consumption among children. To the surprise of naysayers, the positive impacts were abrupt. 

So far, 15 U.S. states and Washington D.C. have legalized recreational marijuana, and 36 states have legalized medical marijuana. A report from the National Association of Realtors (NAR) indicates that “states where medical and recreational marijuana have been legalized for more than three years have seen more increases in demand for commercial properties.” Specifically, 42% saw an increase in demand for warehouses, while 27% saw an increase for storefronts, and 21% saw an increase for land. And of the states that have had legalized recreational and medical marijuana the longest, 32% saw commercial lease addendums addressing the growth, and 30% saw lease addendums addressing sales of marijuana.

On the residential front, the impact appears to be mixed. The NAR report reveals that “in states where marijuana was legal the longest, 27 percent had seen a decrease in residential property values near dispensaries and 12 percent had seen an increase.” Adjusting to the new reality, landlords are adding addendums to leases. Where recreational marijuana is legaliz, 58% to 67% of residential property managers have seen lease addendums to restrict smoking on properties.

As for Colorado and Washington, an SSRN study identified that neighborhoods in both these states experienced a 7% home price appreciation as marijuana dispensaries opened nearby. The research shows that although homes of all price levels realized increases in their values, marijuana legalization’s impact on more-expensive homes’ values is different from the less-expensive ones.

Still and all, with the U.S. retail marijuana sales projected to reach $37 billion by 2024, one thing is for sure: It’s no longer an emerging niche.

Real estate markets with fully legalized marijuana for recreational use may attract more homebuyers, including marijuana consumers, entrepreneurs and job seekers. With more marijuana stores opening up, the demand for labor is on the rise, and so is the need for homes. Increased property sales and higher rents will be the most significant payoffs.

It’s interesting to note that new dispensaries’ impact on housing prices is rather similar to new grocery stores’ impact (paywall). A preference for neighborhoods with more dispensaries for convenience could indicate that marijuana stores are increasingly seen as one of the top amenities for some homebuyers. 

By bringing an influx of cash in tow, marijuana legalization is often touted as the new backbone of an otherwise struggling economy — especially in rural communities. It has even been shown to significantly bolstered municipal tax bases, funding developments that were otherwise overlooked.

However, several elements determine the success of a pot venture and its positive effect on real estate. From a town’s population and political climate to its geography and location near a blocked cannabis town, many factors come into play when reaping a windfall from legalized marijuana. These positive effects may take a downward plunge once the neighboring states also legalize recreational marijuana, slashing the ensuing real estate demand. But the future isn’t easy to predict.

Let’s be honest: The future looks green. Perhaps the effects of marijuana legalization aren’t as bad as some might have initially believed. Perhaps there is an upside to this new emerging industry. As for the future, we are still learning to navigate this new industry.

However, it seems that both residential and commercial landlords can take a deep breath. The cannabis sector is providing strong tenants, in turn providing an even stronger demand. The best guidance I can give for brokers, owners and investors is to read up on the legalization in each specific municipality and state that you occupy. Know your rights, know your tenant’s rights, know the laws and get ample insurance. 

Whether real estate prices will continue to rise or plateau because of marijuana legalization is hard to soothsay. But for now, it’s worth noticing that it’s helping troubled American retail real estate and is nothing short of a boom.


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