By Mike Phelan, Mid-America Real Estate

Marijuana’s legalization in Minnesota has paved the way for a thriving industry, poised to generate significant revenue for the state. In the initial two months following the imposition of a cannabis tax, Minnesota collected $1.5 million in taxes from hemp-derived THC products. Projections estimate that by 2026, an additional $84M will flow into the state’s general fund from the cannabis tax. Despite these promising financial gains, the real estate sector’s response has been relatively subdued, with minimal immediate effects on property values and rental rates. However, the future implications for the real estate market could be substantial as the marijuana industry gains traction.

Anticipated Shifts in Real Estate Demand

While the legalization of marijuana has yet to significantly impact the real estate market, this scenario is likely to change with the expected opening of dispensaries in 2025. Observing trends from other states where marijuana is legal, it becomes evident that commercial real estate has experienced a surge in demand. Warehouses, land, and storefronts required for marijuana-related businesses have led to higher property values and rents in these areas. Minnesota’s real estate market is expected to follow this pattern, focusing on appropriately zoned properties.

Challenges and Opportunities

Despite the benefits, challenges loom for the marijuana real estate sector. Minnesota’s liberal licensing law grants municipalities the authority to determine the maximum number of licenses and zoning regulations for cannabis businesses. This decentralized approach introduces complexity and hesitation for multi-state operators (MSO’s), entities that landlords commonly prefer leasing to. Additionally, these companies will put a further squeeze on a tight market by leasing or purchasing buildings that other retailers are vying for. According to a Wall Street Journal article, “the national rate of available retail space fell to 4.8% in the second quarter of 2023, the lowest level in the 18 years the data has been tracked.”

Minnesota’s legislation has a unique emphasis on supporting social equity groups, local residents, and individuals impacted by non-violent marijuana charges. A notable aspect is the state’s mezzobusiness law, akin to breweries, permitting entities to grow, manufacture, and sell marijuana under certain conditions. Such initiatives provide new opportunities for a diverse range of participants in the industry. Most MSO’s require the ability to grow and manufacture their own products to make money. By limiting their ability to do so in Minnesota, it will be harder for these national groups to break into the market, or they may choose to skip the market.

Implications for Real Estate Stakeholders

Landlords and investors in Minnesota’s cannabis real estate market face a mix of challenges and opportunities. National retailers often prohibit the sale of cannabis within the shopping center in their leases, leading landlords to prioritize established relationships over cannabis store tenancies. Additionally, federally insured lenders are not permitted to allow landlords to lease space to cannabis users in buildings they lend on. This will force landlords to either deny leasing or refinance with private financing. Federally insured banks are also not permitted to transact with cannabis companies (deposits or credit/debit processing). Safety concerns arise from the cash-intensive nature of the industry, which combined with large transaction volumes, increases the risk of crime. Note these financial concerns might change soon with the SAFER Act, being discussed in Congress now.

Conclusion

Marijuana’s legalization in Minnesota holds significant promise for economic growth, as evidenced by the substantial tax revenues other states have benefitted from and projected to be generated in Minnesota. While the initial impact on the real estate market remains limited, the forthcoming introduction of dispensaries is expected to reshape the industry. As the commercial real estate market adapts to the evolving demands of the marijuana sector, stakeholders must navigate challenges related to zoning regulations, financial restrictions, and safety concerns. By embracing opportunities while mitigating these risks, Minnesota’s real estate market can effectively leverage the growing marijuana industry for mutual benefit.

Mike Phelan is a Senior Retail Specialist at Mid-America Real Estate – Minnesota, LLC.

This article originally appeared in The Connection, a monthly newsletter publication of the Minnesota Shopping Center Association. To learn more about MSCA and what they do for the Minnesota retail industry, visit https://www.msca-online.com/.