Is the grass really greener on the other side?
Currently, cannabis is legal for recreational use, medicinal use or both in 36 states plus Washington, D.C. And one interesting “side effect” of legalization has taken place in the real estate market.
Between April 2017 and April 2021, property values rose $17,113 more in states where recreational marijuana is legal, compared to states where marijuana is illegal or limited to medicinal use, according to Real Estate Witch's 2021 Marijuana Study. With each new dispensary a city adds, property values increase by $519 — so you can only imagine what Colorado’s property values look like today!
Legalization has been shown to bring in fresh demand for housing, cannabis tourism, and a wave of new business along with it. It’s also an incredibly lucrative opportunity for local and state governments to tap into a new source of tax revenues. These benefits have inspired some realtors and investors to pay special attention to markets where marijuana is legal.
Population influxes from the legalization of marijuana have been shown to spike demand for housing. And as demand for housing goes up, so do property values—especially if there’s a limited supply.
During the first year that dispensaries officially opened in Colorado, the state’s population boomed, and Denver became the country’s second-fastest growing city (the city’s population grew by more than 100,000 between 2014 and 2015). When Colorado opened its first recreational dispensaries in 2014, the median sale price of homes in metro Denver was $265,000. Today, the median sale price is a whopping $600,000.
Although there are many nuanced reasons why home values increase and decrease, Colorado provides a good case study because, even within the state, property values in cities with dispensaries are higher than cities without dispensaries.
There is also a plethora of research to back the fact that proximity to dispensaries increases home values. Real Estate Witch's Marijuana Study revealed that home values increased by $22,090 more in cities where recreational dispensaries are open, compared to cities where recreational cannabis is legal but dispensaries are not yet open. Furthermore, a 2018 study published by Colorado State University found that home prices within a half-mile radius of a retail cannabis store increased by 7.7%.
Now, in the midst of the current seller’s market, homeowners in states where cannabis is legal are in a strong position. Since the start of the COVID-19 pandemic, interest rates have reached historic lows, and buyers have been jumping at the opportunity to buy homes. Houses have only been staying on the market for an average of 25 days, and mortgage purchase volume is expected to reach nearly 1.7 trillion by the end of 2021. With the right strategy and timing, a home seller could make high returns.
After a state legalizes marijuana, a “ripple effect” tends to occur. In addition to gaining a new source of tax revenue from the sale of cannabis, states also gain new businesses, increased job opportunities and, consequently, attention from investors.
When a state legalizes marijuana, they use the new source of tax revenue to fund capital expenditures such as education, infrastructure, or substance abuse treatment programs. Thus, improvements in these areas, especially education, can help increase property values.
Consider that for every $1 million increase in tax revenue, home values increase by $470. Now consider that in 2020, the eight states that reported a full year of marijuana tax revenue earned a total of $2.3 billion — including $1 billion in California alone. And the seven states (plus Washington, D.C.) that have yet to collect a full year of marijuana taxes are predicted to collectively bring in more than $600 million in new annual tax revenue.
In addition to the new business opportunities that legalizing marijuana provides for dispensaries, medical practices and farms, there are also ancillary businesses that reap the benefits of legalization. Currently, there are at least 13,000 to 18,000 ancillary cannabis businesses in the United States, which range from transportation to tourism. Legalization affects nearly every industry — and brings consumers along with it.
When the population and business sectors of a state increase, so do the job opportunities. As the economy expands in a given market, there needs to be a solid workforce to support new growth. Jobs are provided directly from the legalization of marijuana through services such as dispensaries but also indirectly within industries like restaurant, hospitality, and retail, which benefit from increases in tourism and new residents.
Larger populations, booming businesses, and more employees all contribute to the growth of the real estate sector when cannabis is legalized. As more people relocate to a state, the need for multifamily and workforce housing increases, as does the need for office space, retail centers and storage.
Even REITs have tapped into the cannabis market. One example is the single-use “specialty REIT” Innovative Industrial Properties, Inc., which exclusively invests in properties used for the cultivation and production of cannabis products. The REIT’s revenue has more than doubled since 2020, translating to higher dividends for investors.
For savvy investors looking to take advantage of low interest rates, purchasing real estate in a cannabis-friendly state is clearly an attractive option. As profits from their investment grow, they can sell their initial property and reinvest the money into more commercial space. And by making the sale through a 1031 exchange in places where marijuana is legal, such as California, investors can defer capital gains taxes in the process.
Cannabis legalization has clear positive effects on the real estate industry and local economies. Despite regulatory hurdles and patchwork lawmaking, the marijuana market shows no signs of slowing down, and for investors, markets where marijuana is legal presents a huge opportunity for high ROI.