The year 2019 was certainly a step backward for the cannabis industry—publicly-traded cannabis stocks tumbled roughly57 percent year over year as of the third quarter of 2019. Nevertheless, cannabis operators remain bullish and stead-fast in their pursuit to expand their footprint and open new retail locations. State laws, local ordinances and financing restrictions have provided formidable challenges for operators to find suitable real estate; however, as in most cases with limited supply and strong demand, the lack of available cannabis real estate has aided in inflating prices for cannabis permissible trade areas across the country. Intensifying the demand is the desire for the operators to be first to market.
The first-mover advantage has proven to be a driving force in the cannabis sector as cannabis operators realize substantial advantages over their competition with many municipalities’ enacting anti-clustering provisions and minimum setbacks from other dispensaries. These setbacks can range from 1,000 feet to one mile, and effectively allow operators to control entire trade areas or even entire markets.
In ultra-restrictive municipalities like Orlando, Fla., municipalities have instituted citywidecaps on the total number of dispensaries permissible; for example, Orlando permits only seven retail dispensaries for the entire city. All contributing to a more competitive marketplace and leaving cannabis operators with the decision to chase pricing and terms to outbid their competitors and traditional retailers. Chicago is the sector’s latest example of the first-to-market advantage.
The city’s recent adoption of recreational cannabis regulations brought the implementation of a district lottery system. The city granted 37 recreational dispensary licenses, designating specific geographies to specific license holders for their operation across the city seven districts. Preempting the lottery’s reveal on Nov. 15, Chicago supplied the license holders with an unofficial set of permissibility guidelines, creating significant uncertainty in the site selection process.
However, it hasn’t been all tailwinds and windfalls for cannabis landlords. Both operators and landlords have As a result, Chicago license holders flooded the city with offers on real estate in what turned into a feeding frenzy to secure the most valuable retail positions. Many landlords found themselves in situations with multiple offers, non-refundable deposits,pre-paid rent guarantees and even key money. An enviable situation for any landlord experienced significant challenges in 2019 with the falter-ing of the public markets. Investor confidence has waned and as a result, it has been much more difficult for operators to raise capital, and despite approval in the House, the federal government has yet to provide a solution that would unlock the traditional debt markets. Instead, operators and landlords have to structure all equity purchases or find private debt—a much more expensive and risky option. Consequently, free cash flows on potential real estate investments have compressed and investor’s exit capitalization rates have risen—pushing the lease prices to even higher rates and in many cases leaving landlords left to ride out the storm until the capital markets normalize.
Robert Wilder serves as the managing partner of Blake Wilder Strategies. Prior to his time with BWS, Wilder was the vice president of land acquisitions for Blake Communities, a boutique private equity firm specializing in lot and land development for single-family homebuilders. During his time withBlake Communities, the company operated in 15 markets, across eight southeastern states with over 10,000 lots and110 communities under management. Wilder was responsible for the leadership of the company’s acquisition team, as well as executing his specific territories. He may be reached at
Learn more at www.blake-wilder.com.