Multiple studies have confirmed the medicinal benefits of marijuana, but what about its impact on the health of the housing market? Does medical and recreational legalization lead to growth in home values or is the pot industry just blowing smoke?
This past year, voters in California, Massachusetts, Maine, and Nevada all legalized recreational use while Florida, Arkansas, North Dakota, and Montana voted to legalize or expand medical use in those states.
One thing is clear, pot entrepreneurs are contributing to real estate booms in commercial and residential markets in states that have legalized the drug for medical recreational use.
Impact on Commercial Sales: Previously vacant warehouses and factories are now home to growers while long-abandoned strip malls have become the storefront for pot shops. The pot industry has created a huge demand for commercial operations. As a result, states like Colorado and Washington are seeing premium prices for building leases and purchases within the proper zoning.
Buying real estate is an attractive asset to marijuana growers and retailers because it provides a safe haven for their profits that many banks are still reluctant to manage due to federal regulations and give them more freedom to create specialized spaces for their business. Landlords also notoriously price gouge marijuana tenants, so buying makes good business sense over renting.
Successful owners of marijuana businesses quickly turn to real estate and become landlords themselves. In Colorado, Polk and Stone rents properties to marijuana businesses with the agreement that rent will increase only 3 percent a year. In an industry where rent can increase by 50 percent from year to year, this business model is enticing to marijuana entrepreneurs.
Impact on residential sales: Colorado's state law allows for counties to determine if they and how they want to legalize and regulate the drug. Areas where it’s legal attract more homebuyers, including marijuana users as well as entrepreneurs and job seekers. As more growers and retailers open up shop in these municipalities, the demand for workers rise. The influx of new residents inevitably leads to more home sales and higher rents. There are also plenty of people moving to pot-friendly states without intent to work for the industry, but rather to enjoy the bud of its labor.
Impact on home values: Realtor.com reports the four states with at least a year of experience with recreational marijuana sales showed a marked increase in home prices — well above the national median price.
The data from Colorado provides some of the best insights on what happens to the housing market after recreational use is legalized because it has permitted its use the longest. Since the first shops started operations on January 1st, 2014, the median home sale price in the state has risen from $248,000 in the first half of 2014 to $298,000 in the first half of 2016 according to the realtor.com analysis. In jurisdictions where the drug can be purchased, the median sales price of homes in the second quarter of 2016 were a hit $305,200 while homes in areas where it is banned only went for $267,200. Of course, there are other industry sectors that have been experiencing rapid growth in Colorado, so it’s difficult to contribute the rise in home prices strictly to the rising business of pot, but it's an obvious leading contributor.
Unfortunately, not every homeowner in states with legalized weed is getting a good deal. On the flip side, Colorado neighborhoods harboring grow houses lose value. The pungent odor the plant emits turns off home seekers.
Concern for criminal activity: One of the greatest concerns of detractors of legalization is the claim it will encourage more crime and further reduce home values of those living near grower, manufacturers, and retailers. Looking to Colorado again, in Denver, the crime has grown by 44% as reported to the National Incident Based Reporting System since legalization. But police argue that the system potentially over counts crimes and prefer to cite the FBI's Uniform Crime Report which indicates only a 3.5% increase over the same time. It's important to note, however, the city began tracking marijuana-related crimes as well, which make up less than 1% of all offenses. Experts conclude that the rise in crime is tempered when taking population growth into account, and not directly tied to the sale or use of the drug.
Dealing with real estate transactions: From a real estate professional perspective, a lingering question is how to deal with money that comes from an industry that is still federally prohibited under the Controlled Substance Act. There is a serious lack of banking services for commercial operations in the medical and recreational marijuana business. Although many title companies will help close on a cannabis deal, they will not facilitate the exchange of funds. That's because banks refuse to work even indirectly with marijuana business owners. As a result, title companies have formal policies against serving as escrow, especially when the land is designated for pot-related use, but will issue limited title insurance policies on the land that won't cover federal governmental actions such as civil and criminal forfeiture.
As more states pass legalization, this will provide opportunities for agile and creative real estate brokers to provide much needed professional guidance for marijuana business owners.
Written by Amanda Farrell, Proplogix