Legal cannabis could be a $75 billion business by 2030

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In Los Angeles, a pair of soon-to-open coworking spaces will offer a twist on the formula popularized by behemoth WeWork and The Wing in New York City. Though they boast whiteboards and shared workspace, host regularly scheduled meet-ups and speaking events, and even offer access to advisers and investment capital, these LA incubators aren’t about computers—they’re about cannabis.

Developers see the marijuana industry as an increasingly profitable arena for innovation and business—and coworking spaces as key to connecting players in an industry that, for some, has the frisson of the Wild West.

As the cannabis industry matures, so too will the real estate industry associated with this heavily regulated business. Developers want to capitalize on the potential they see in creating new innovation hubs, office parks, and upscale retail around this emerging opportunity.

According to BDS Analytics, a financial firm that specializes in the cannabis market, California’s marijuana industry is predicted to hit $3.7 billion in sales in 2018 and rise to $5.1 billion in sales in 2019, part of the overall growth of legal sales nationwide.

“This is really an emerging industry, and I think LA is going to be the headquarters of cannabis in America,” says Sean Beddoe, founder and president of Bow West Capital, the lead developer for one of the projects, Green Street. “The Starbucks of the cannabis industry hasn’t been created yet.”

The appeal of cannabis coworking

The backers of both Green Street, a 67,000-square-foot building in Los Angeles’s Jewelry District slated to open in November, and Paragon Space, a four-story office in Hollywood set to open in late August, aren’t interested in stoner-themed offices plastered in tie-dyed ganja posters. No cultivation or retail operations will be permitted in either building, just the work of service industries connected to cannabis, like advertising, branding, and legal firms. The coworking spaces are being pitched to potential clients in the same manner as any startup space, with an emphasis on innovation, technology, and business development.

“As time goes on, the political risk of investing in pot is subsiding,” says Matt Karnes, a financial analyst with GreenWave Advisors. “If the Trump administration was going to do anything, it would have already. That’s putting more institutional investors at ease, and they’re starting to open their eyes and look at businesses in the cannabis and tech space, anything ancillary to the plant-handling part of the industry.”

Green Street, which is set to contain a members-only club, restaurant, and rooftop space, and host a class of 10 to 12 startups seeking advice and funding, may be the “Soho House” of cannabis, says Beddoe, a reference to the successful group of upscale members’ clubs. Paragon, a project of the startup ParagonCoin, will only accept payment in its proprietary cryptocurrency.

Beddoe believes marijuana presents commercial landlords with a sizable opportunity. Developments like Green Street allow them to get involved in the business of cannabis without the regulatory risks that come with the cultivation and retail sides of the business. Bow West and Green Street Agency, a cannabis-centric branding and advertising firm partnering on the project, purchased the turn-of-the-century building for $14 million in December. According to Beddoe, they’ve already leased most of the space.

Jessica VerSteeg, CEO of ParagonCoin, says that Paragon Space is also nearly full, in no small part, she argues, because it fills an important need. Many cannabis-related businesses—even those that don’t directly deal with the product—have trouble finding office space, and when they do find space, owners often charge a premium due to the perceived uncertainty of working in weed. It’s not unheard of for cannabis retail to pay two or three times as much as a traditional tenant.

Paragon offers the security of a landlord comfortable with the industry, the ability to smoke a joint in your office if you so desire (a no-no at WeWork), and competitive rents that range from $449 a month for access or between $2,070 and $2,300 for a private office.

“There isn’t a 4:20 theme anywhere,” says VerSteeg. “It’s whiteboards, desks, and all the same amenities as any other startup space. But here, you know that everybody knows the industry, and could be a potential partner.”

In cannabis, as in real estate, it’s all about location

Cannabis is a land-hungry industry, and finding room for cultivation and retail operations offers the real challenge, and profit center, for cannabis-related real estate. In California, for instance, thanks to Proposition 64, which legalized recreational use, cities can pass their own zoning regulations and the number of licenses is strictly controlled.

But even in a highly regulated industry that is technically illegal on the federal level and lacks traditional banking access, many developers see opportunity in retail space and warehouses for growing, processing, and manufacturing. Industry monitoring firm New Frontier Data believes that by 2020, sales will rival California’s $7 billion wine industry, and prices for scarce square footage have already skyrocketed. In the city of Lynwood, a city in Los Angeles county where taxes on cannabis companies have been lowered, industrial buildings that once cost $107 to $120 per square foot in 2016 now go for $300 or more, according to the Los Angeles Times.

For Tim McGraw, it’s all about making things easy for tenants. He co-founded Canna-Hub, a Sacramento-based company that’s developing two cannabis-specific business parks in the northern half of California. On the company’s 31-acre site in Mendota and 80-acre site in Williams, startups can find a home base that’s appropriately zoned and from which they can operate. There’s no worry about wrangling with municipalities or trying to convince a landlord skittish about marijuana, the extensive power and water needs of growing have been taken care of, and the opportunity to work alongside like-minded companies offers the same synergies found in startup hubs.

“There are cannabis guys trying to do real estate, and real estate guys trying to do cannabis,” McGraw says. “But there are few people who know both worlds, and have actually built large-scale facilities.”

Cresco Labs, a large, Midwest-based manufacturer mostly involved in medical marijuana, recently announced it will move into Canna-Hub’s Mendota facility as part of its planned expansion to the West Coast. In addition, a handful of cities in Southern California have also inquired about hosting a Canna-Hub. Expansion to the rest of the state is “almost certainly going to happen,” says McGraw.

California industrial real estate—the type of real estate attractive to large-scale cannabis growers and product manufactures—has entered the “surge” part of the market cycle says Spencer Levy, a real estate analyst for CBRE who has studied the industry. He predicts there will eventually be a decline in prices, once the industry matures and consolidates. But until then, he argues, cannabis will be a big driver pushing up the price of already-scarce warehouse and manufacturing space. Los Angeles’ industrial vacancy rate in the first quarter of this year was 2.2 percent, the lowers in southern California.

“It’s like the microbrewery trend,” says Levy. “You’re eventually going to see some pull-back. But right now, local is the driver for retail and flex industrial space, since companies want to be close to their customers. Cannabis is just the latest industry to start competing for those spaces.”

Building a brand with retail

The competition for retail space will only increase as the industry evolves and matures. Due to supply constraints caused by regulation (only certain commercial spaces are far enough away from schools and parks) and federal laws that make it illegal to cross state lines with cannabis (you can’t yet buy weed on Amazon), marijuana is a very localized business.

These uncertainties make owning real estate that much more important. Adam Berk, CEO of Stem Holdings, an Oregon-based company that purchases and develops cannabis-related commercial and industrial spaces, says that it pays to own every aspect of the business in this industry. When it can cost millions to buy and retrofit properties, that’s something you want to own and have on your balance sheet, he argues.

“You want to be able to control your destiny, and not have a landlord back out,” Berk adds. “Most people in this business say you want to own the process ‘from seed to sale.’ I think you need to take it one step further and start with the facility.”

MedMen, a high-end national chain of cannabis stores based in LA, sees retail real estate as a central pillar of its growth strategy. According to Daniel Yi, the company’s communications director, MedMen focuses on opening stores in high-visibility corridors, such as 5th Avenue in Manhattan or Abbot Kinney in Venice, California, to normalize cannabis retail. The company plans to grow from 14 stores to 45 stores by 2020—including opening dozens of locations in Florida—and expanding its footprint in Las Vegas.

“As the industry grows, the competition for those key pieces of real estate will only grow,” says Yi. “It’s going to get harder, not easier. That’s why it’s important to have that Abbot Kinney store now. We are paying that premium for the branding opportunity afforded by these stores, because we believe in that strategy.”

Yi admits that the high-end strategy isn’t shared by many if his competitors. But MedMen believes in the value of mainstreaming the industry and locking up affluent customers as the “green wave” grows. Earlier this spring, investment firm Cowen estimated the market will grow to $75 billion nationwide by 2030. Like any retail business, high-end locations will be worthwhile investments, Yi believes. The company is currently “scouring” Canada for potential store locations after the country passed nationwide legalization for recreational use, set to go into effect in October.

“We’ll look back at this period of the cannabis industry as quaint,” Yi says. “It’ll be equivalent to looking back to when the alcohol industry was run by Al Capone.”

Turning cannabis from a curiosity to an anchor

The next six months will see “exponential” growth in the cannabis industry, according to many of the sources quoted in this story. Michigan has a recreational-sales initiative on the ballot in November and legislators in both New Jersey and New York are strongly considering it. California in particular will go through a shakeup. An ordinance that requires all products be lab tested and tracked went into effect this summer, leading many to brace for a supply shortage. Some even predict that so many small startups will be bankrupted by the compliance costs, there might be a bit of a pot property bubble, which will lead to underpriced assets and consolidation.

In addition, the release of more retail licenses in Los Angeles at the end of the year has already caused investors to seek out real estate for potential storefronts, according to Rose Vasilj, a local real estate broker who specializes in the cannabis industry.

“These new compliance laws present a huge inflection point,” says Bow West’s Beddoe. “It’s a great opportunity for consolidation. This industry will be like the alcohol industry, and you’ll have an oligarchy who owns it.The size and potential of cannabis in incomprehensible; it’s all about who’s willing to take all that risk on the front end.”

With growth potential measured in the billions of dollars, it’s certain that more investment, especially in real estate, will continue to shape the nascent cannabis industry. What will be interesting to watch is how—as more areas legalize marijuana and the business becomes more mainstream—companies invested in weed will go from struggling to find suitable spaces to operate, to being anchors and lead tenants of future developments.

“At the end of the day, our developments speak for themselves and the economic benefits they bring to cities,” says Canna-Hub’s McGraw. “In real estate, it’s always good to be wanted.”

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