Chairman and Chief Executive Officer of Zoned Properties, Inc., a strategic real estate development firm.
In November 2020, Arizona voters approved Proposition 207, also known as the Smart and Safe Arizona Act, by a margin of 60% to legalize recreational cannabis. The state achieved one of the fastest adult-use rollouts out of any U.S. cannabis market. By the end of January 2021, adult consumers were making dispensary purchases, and there were 73 dispensaries approved for dual licenses out of more than 100 on the first day of recreational sales. In contrast, Maine took nearly four years to answer voter wishes.
The outcome was an influx of out-of-state brands and investors who were confident in the market due to its successful rollout. Arizona’s strong consumer demand and opening of off-site manufacturing and cultivation sites also boosted out-of-state interest. These facilities require a much smaller capital investment than acquiring a vertically integrated license and make brand expansion more accessible for smaller players in the market.
Overall, the effectiveness of the adult-use rollout bolstered Arizona’s cannabis industry reputation and ultimately attracted investment from larger brands and companies because of its good business practices. Only time will tell if the next wave of legalized states will follow Arizona’s lead or if the commercial property in those markets will offer similar opportunities.
New Highs in Commercial Real Estate
When legalization hit Arizona, the land grab race was expected, especially with the addition of 26 social equity marijuana dispensary licenses. As a limited license market, Arizona is witnessing increased consolidation and more traditional capital.
From my company’s predictions, based on the roughly 200 marijuana commercial real estate projects we have seen in the state, with an average of about $1 million to $2 million per project, cannabis commercial real estate investment and development opportunities in Arizona could reach close to $1 billion in the next five years. The northeast-based NewLake Capital Partners alone entered a $20.5 million real estate deal this summer to lease property to a marijuana operator.
Lessons Learned in Arizona
Even with these great opportunities, what I also saw during the first year of legalization in Arizona was a lack of communication between state and local governments. Legalization offered new business opportunities for local municipalities in Arizona; however, in many cases, these communities did not receive adequate education or guidance from the state government on how to move forward on these policies.
This has often been the case with legalized and regulated cannabis across the U.S., and objectively there may be understandable reasons for these challenges; government tends to move slowly, while voters tend to want immediate results, which can cause disconnects. It is still unclear whether the state government is responsible for educating local planners on how to enact local zoning codes for new industries. Various cities across the U.S. have dealt with these issues differently. Regardless, more educational resources are needed to further advance the industry while ensuring future prosperity for communities.
As more legal cannabis markets roll out, Arizona offers lessons for commercial real estate firms, developers and investors who are interested in entering the industry:
1. There is a limited number of industrially zoned commercial properties in the U.S. that offer a multibillion-dollar real estate opportunity for cannabis-related projects. This growth will only increase as more markets legalize.
2. Commercial real estate offers an entryway into the cannabis space with less risk. Instead of spending significant capital on acquiring a license or entering a competitive license lottery, investing in real estate offers an opportunity to be involved in a variety of ways. From real estate investment trusts (REITS) to companies specializing in cannabis real estate development services. There are also opportunities in property technology and franchising to look into.
3. Relationships with city municipalities will matter. It is not just the states that are legalizing cannabis but also individual cities and towns. Many municipalities are not immediately equipped with the required resources to handle the implementation of these processes and regulations, which will require extra legwork from operators.
Opportunities abound within the highly-regulated cannabis industry, but choosing the right opportunity isn’t always clear. For those looking to enter the market, the common thread of success is having an experienced team that understands the industry’s regulatory nuances.