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Commercial Department: Property TypeCast: May 2017

 

Property TypeCast

Retail rents get a boost from medical marijuana legalization

c_2017-05_PropertyTypecast_chartVoters in Florida, North Dakota and Arkansas in November 2016 voted to approve medical marijuana initiatives in their respective states. These are not the first states to have done so, and if current trends persist, they are not likely to be the last to legalize medical cannabis. 

How has medical marijuana legalization affected commercial real estate markets in these states?  Although medical cannabis legalization probably will not have a large direct impact on the multifamily sector, it may have a tangible impact on the retail market.

If, say, a storefront was occupied by a medical marijuana outlet, how would this affect neighboring stores? Would the new tenant drive traffic to a shopping center or keep people away? Would it increase or decrease the value of the real estate?

It is possible that medical marijuana outlets may affect retail real estate fundamentals, even if they aren’t directly co-located alongside other traditional retail tenants in typical neighborhood and community shopping centers. In and of itself, medical cannabis may drive demand for unused retail space (or warehouse/distribution space).

The test

To gauge the impact of medical cannabis on the retail market, we identified the states that had already enacted medical marijuana legislation and examined their respective real estate metrics before and after such legislation was approved. Specifically, we compared the two-year asking-rent growth rates in the years immediately following medical marijuana legalization in various metro areas to the two-year asking-rent growth rate of the U.S. as a whole during that same two-year period. 

To consider the broadest set of metros with enough time to analyze two-year rent growth patterns, we chose those metros for which we collect retail-rent data in states that have legalized medical marijuana up to 2014. This yielded 17 metros across 12 states. Of the 17 metros examined, 12 outperformed the U.S. mark for the two-year period reviewed — with nine of those markets posting two-year retail rent-growth rates exceeding 3 percent.

The results

It could be argued that these metros already outperform the U.S. in terms of retail-rent growth, that the results could just be random luck and that the legislation had no impact. To determine whether these results were random, we compared differences across time. That is, we measured every metro’s two-year rent-growth rate against the U.S. rate from 2001 to 2016, and then we compared the average for all the periods to the rent gap in the two years following medical marijuana approval.

In the two-year period following medical cannabis legalization, retail rents in all 17 metros outperformed their average two-year U.S. rent differential by 1.02 percent. Does this mean that in the next two years we can expect larger-than-normal rent-growth rates for the retail sectors in Florida, Arkansas and North Dakota, which recently approved medical cannabis? That is not for us to say, nor is it the intention of this article, although the data would suggest that it is possible, keeping other factors equal.

There are many other economic, demographic, cultural and amenity-related factors that impact rents. Using rent data alone does not determine how attributable the legalization of medical marijuana was to these metros’ retail-rent growth. Still, this exercise offers suggestions about the potential effect of a growing cannabis industry on the demand for real estate.


 

Barbara Byrne Denham is an economist in the research and economics department at Reis Inc. She previously served as chief economist at Eastern Consolidated and is a Ph.D. candidate at New York University, where she has studied economics, monetary theory and game theory. Reach her at barbara.denham@reis.com. Evan Taback is an economic analyst in the research and economics department at Reis Inc. Reach him at evan.taback@reis.com.

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