Staying Ahead of a Growing Trend
Though a few years ago it was practically unthinkable, today the legalization of marijuana seems like an inevitable trend sweeping the country, state by state. Putting aside the politics and whether or not you agree with cannabis use, legalization obviously raises some large questions when it comes to real estate.
As of this writing, 26 states plus DC have laws legalizing marijuana in some form, and 8 of those states have legalized recreational use. Enough time has now passed since Colorado's January 2014 legalization that most people can see the incredible tax benefits and profit potential of legalization. Medical marijuana, legal in California since as far back as 1996, differs quite a bit from recreational use, so we'll just focus on recreational and all of its idiosyncracies.
In 2016, sales of legal cannabis reached $6.7 billion, and profits are expected to top $20 billion by 2021 according to Acrview Market Research. Though specific laws vary by state, there are some facts that are broadly applicable in any legalized state.
In addition to legally partaking in marijuana, most legalized states also allow for residents to grow their own plants in their residence. In most places in Colorado, this means residents can grow as many as 12 plants. For renters, though, this number - and their ability to smoke indoors - is at the mercy of their landlord.
Landlords can prohibit growing plants on their property by adding a clause to the lease. If no such clause exists, the landlord can fall back on an anti-drug or crime policy that was hopefully included. If no such clause exists, though, they may have a hard time preventing renters from legally growing plants on the property.
Just like cigarette smoking, landlords can prohibit renters from smoking marijuana indoors. The grey area exists around partaking in other forms aside from smoking. Edibles and concentrates are both popular methods of ingesting marijuana, and both are naturally much harder to prohibit.
When it comes down to it, though, legal marijuana use is a growing trend, and marijuana tourism is very much a thing - and a very profitable thing. It's up to the landlord whether or not they want to limit or prohibit marijuana use on their property, but in certain markets and to certain people, strict rules (and strict adherence to those rules) may turn away potential renters.
Once the conversation shifts to homeowners, the subject becomes more straightforward. Obviously if it's your house and you live in a state with recreational marijuana, then you can grow, smoke, or ingest whatever legal substance you want. Don't go smoking unwanted on a neighbor's property, but what you do in your house is your business.
But then there's the HOA.
Regardless of the legality in a city or state, it's up to each individual homeowners association how, or if, they choose to limit pot use. Some associations only address use in or around neighborhood common areas, while others may not mention it at all. Considering the newness of the issue and strong feelings on both sides of the argument, many HOAs choose to ignore it unless it becomes a problem - like when smoke drifts into the neighbor's house or AC system. When in doubt, it's best practice to ask the HOA what the general rules are. Just be prepared for a shrug.
In the commercial space, some are worried that a real estate bubble is forming. This is due to warehouse costs soaring through the roof in places like Denver, where warehouse vacancy fell from 7.5% to 3.7% in just 5 years. Millions of dollars are being poured into previously-unwanted warehouse spaces since their climate controls and spacious layouts make them perfect for indoor cannabis cultivation. The sweet spot for warehouses is somewhere between 8,000 and 20,000 square feet, and Denver warehouse prices in 2016 hit $8.40 per square foot, compared to the national average of $6.30/sf.
And it isn't just warehouses - Denver alone has over 200 marijuana stores, many of which are located in high-end shopping districts and former gas stations. With marijuana still illegal at the federal level, possession is prohibited at airports and it's illegal to carry across state borders.
The High and Wild West
For now, with a continuous trickle of newly-legalized states, most people view these as the first days of a wild new frontier, one that's highly-taxed and ripe for potential medical applications. Only time will tell where we go from here, but staying ahead of the trend has already proven very profitable for some savvy businesspeople.
If you're interested in learning more and seeing how these new trends fit into your real estate career, check out our Marijuana in Real Estate course.