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The Cannabis Market Recalibrates
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CRE Market Insight: Cannabis Sector
After the Commonwealth passed legislation allowing for the adult-use of recreational marijuana, a flood of interest, speculation, and capital flowed throughout the entire state as companies looked to lock up the real estate, municipal Host Community Agreements, special permits, and funding necessary to launch their cultivation and retail dispensary operations.
With any gold rush, those who possess the gold set the terms of the market. Despite the legislation’s best efforts to create an equal playing field and provide equitable opportunities for communities who were most disenfranchised by the prior outlaw of marijuana, operators quickly faced the very harsh reality that these opportunities require significant up-front investment in order to launch.
For a dispensary, the total cost to obtain property that comes at premium pricing, build out the operation, file for permits, and be awarded a license could range from $3-6 million. In markets closer to Boston, those figures are even higher. To launch a state of the art cultivation facility, the total investment could be between $20-40 million depending on its location.
As a result, while many local, independent entrepreneurs have been able to open their dispensaries with good success, the market has also experienced a significant amount of investment from large Multi-State Operators (commonly known as MSO’s) and other institutional capital. In its wake, this flood of capital has created a robust cannabis market in Massachusetts. So where do we go from here? Think mergers and acquisitions.
New entrants to the market from this point forward face obvious hurdles. While some markets have no limit on the number of cultivation facilities they will allow, most municipalities who have legalized adult-use recreational sales have a low number of permits that they will issue. Of those cities and towns, many have already issued their total amount. In many markets where permits are still available, the property remaining that is properly zoned for marijuana often have many challenges from a development perspective.
Some municipalities are considering expanding their number of permits, but many have reservations in doing so as a noticeable number of permitted sites throughout the state sit vacant due to a lack of capital or other operational resources.
Because of this, it is no surprise that as companies have settled in and established a commanding presence in the market they have attracted attention from private equity and publicly listed companies from Canada. Nature’s Remedy, a vertically integrated operation with a cultivation facility and two dispensaries in the state, sold for an eye-popping $91 million in 2021 to Jushi Holdings Inc., a company headquartered in Boca Raton, Florida but listed on the Canadian stock exchange.
While this trend will likely continue, there are still opportunities for new startups here in the Commonwealth. In speaking with many industry experts, it is clear that the market is still short on supply. The need for more cultivation facilities could be as high as an additional one million square feet of grow space. Given that each location can only have 100,000 square feet of canopy, that leaves significant room for new entrants in the market.
From here, there may be a few potential paths forward for the industry to grow in the state:
- More capital provided by out of state MSO’s and private equity: this is a trend that may not slow down for some time.
- Mergers between existing small operators: because each company can only have three dispensary locations, the smaller players facing significant hurdles in opening their second or third location may find partnering with a group makes them stronger together.
- Zoning effort by municipalities: possibly a political uphill battle, but with the right amount of lobbying, the industry might convince some markets to expend their land mass available in return for more local revenue.
- Federal legalization: while there are many opinions on this, federal legislation might allow for the movement of goods across state lines. This would present a risk to dispensaries, but for cultivators this could create a new gold rush all of their own.
While much remains to be seen, many opportunities still exist in the cannabis market in Massachusetts. Despite the changing political climate and capital-intensive nature of the business, this “green rush” remains alive and well. Developers and investors should take note.