The State of Cannabis Today: A Michigan Perspective
My name is Scott Hardy and I’m a commercial agent with Coldwell Banker Schmidt in their Traverse City, MI office. I have been involved in the world of cannabis property sale, and acquisition, for over three years representing a major marijuana retailer and grower in the state of Michigan. My initial reluctance about getting involved in this industry was based on pre-conceived notions of Cheech & Chong running a pot shop out of their basement. Today’s cannabis business could not be further from my initial impressions. It is a very complex, highly regulated, and socially responsible business model that is legal in many states (18 for Adult Use Sales and 37 for medical marijuana) and yet a Schedule 1 controlled substance at the Federal level. What does that mean for Real Estate agents and Brokers? What it means is you have some risk and, previously, enormous opportunity for property sales or leasing. I say previously because the world of Cannabis has changed dramatically over the last several months. Here are the new “baseline” assumptions for retail cannabis.
1. Cannabis is currently in a pricing freefall. The wholesale price for marijuana has dropped over 50% which is reflected in pricing of product at the retail level. This puts enormous pressure on those smaller entities who based their business planning on now unattainable revenue/profit projections. Given their overhead burn rate and competition from the larger, vertically integrated, and better funded companies they are going to have a tough time surviving especially in Michigan where there is no statewide cap on recreation licenses. Like every commodity market only the strong survive unless they have a unique product and are able to find their customer base with a larger geographic reach. Cannabis thus far does not have either that reach or unique product.
2. As small cannabis businesses begin to struggle they will be looking for additional funding for survival or for an outright sale of their business to a competitor. While taking on additional sites across the state may be an option for larger cannabis companies, it may not be a good option. Many of these ongoing businesses may be in less than desirable locations where traffic flow is slight, or the competition is stronger. That leaves the larger, well healed, cannabis operators with a several options.
A. Buy the struggling business and operate it under their own banner
B. Underpin the business with their own funding, own that brand, and share in the proceeds of a leaner, better capitalized, retail Cannabis business.
C. Let the business fail and dedicate their resources to their own stores in better locations.
As the majority of the current cannabis stores are in leased property buying and operating those businesses means taking on responsibility for the existing lease obligations which are usually longer term and with rent above the typical market. Changing that lease obligation in that location will mean negotiating with the current landlord for preferable terms. This could mean extending the term of the lease to secure a rent reduction. It also will not involve the current cannabis tenant if they are apt to fail but instead the full faith and credit of their larger cannabis parent. Having a reliable long-term tenant is worth something to a property owner however in dynamic urban areas there still seems to be strong demand for retail lease spaces. Most landlords don’t seem to care if their tenant is “doing well” as long as the rent is being paid. If it’s not, they will find another tenant. In sum the opportunity to sell real estate for inflated prices with correspondingly inflated commissions is no longer the norm. Much like typical commodities markets, no is sure when prices/demand will rebound. Given that we are approaching a fall harvest of bulk cannabis that will flood the market yet again, it won’t be soon. Aligning yourself with a well-capitalized and vertically integrated cannabis entity that has previously committed to purchase, rather than lease, of their grow or retail sites provides some opportunity to reallocate some of those properties to more desirable locations. If those original properties were bought closer to fair market pricing the sale today should actualize equity in today’s market.
Companies with their own year-round grow operation and implementing a seed-to-store business model have a huge advantage once the market is purged of the smaller retailers. The glut of wholesale marijuana supply will also dramatically reduce the number of the independent grow operators. The “wait it out” philosophy and making a few strategic investments in struggling retail operations seems to be the prevalent cannabis business model. The days of non-stop inquiries about property purchases for retail cannabis operations are over for the short term at least in my state, Michigan. States willing to limit the total number of statewide recreational licenses seem the best opportunities for additional real estate investment. I know it takes time, but understanding the licensing requirements of the state you’re operating in makes you a valuable resource to the cannabis industry and to the communities your clients are looking to invest in. Like the gold and land rushes of the previous century the cannabis industry is retrenching. There is still opportunity for real estate agents to prosper but it now takes time and knowledge to provide a true resource to your client.