Marijuana is making an impact on property sales

In two-thirds of the country, real estate has gone to pot – literally.

With the spate of marijuana legalization at the state level in recent years, there is a noticeable impact on the demand for commercial property as well on decisions about residential housing.

These findings emerged in a study from the National Association of REALTORS® (NAR) titled, “Marijuana and Real Estate: A Budding Issue.”

The report indicated that in states where marijuana use is legal – either recreationally, medically, or both – there was an increase in demand for property. Of those polled, about 34 percent said there was an uptick in requests for warehouses or properties used for storage in states where it is legal. About 25 percent of the respondents said there was growth in the demand for storefronts and 20 percent said there was greater demand for land in these states.

“As more states legalize marijuana, the real estate market will progressively have to adjust,” Dr. Jessica Lautz, vice president of demographics and behavioral insights for NAR said in a statement. “From property owners, to manufacturers, to those who simply want to engage for leisure – it all touches real estate in some form.”

Because the time when marijuana was legalized varies by state (33 states and Washington, D.C. now allow for marijuana use for medical reasons while 11 states and D.C. have legalized it for recreational use), NAR split up the study to look at those that allowed marijuana use prior to 2016 and those that adopted legalization after 2016.

Not surprisingly, the states that have had marijuana use legal longest have seen the largest impact.

The NAR survey was conducted via email in September 2019 and polled a random sample of 76,000 NAR members who practice residential real estate and 76,000 members who practice commercial real estate. NAR received 3,062 responses from residential practitioners and 611 responses from commercial practitioners.

In general, REALTORS® have noticed marijuana making an impact on markets in various ways. In states where marijuana is legal in some form, 9 to 23 percent of Realtors polled said they believe residential inventory is dwindling for a few reasons – one of which is all-cash purchases, a staple of those in the marijuana industry.

Although the number is small, between 7-to-12 percent of REALTORS® reported that they’ve seen an increase in residential property values near marijuana dispensaries.

That said, between 8-to-27 percent also reported that they’ve seen a decrease in these property values, so it’s hard to determine if the impact has been positive or negative.

“Residential practitioners are getting used to the new normal of having marijuana legally used within rental properties, while homeowner associations are tasked with setting new rules to address consumption and growth,” Lautz said.

“When the business of marijuana is discussed, some have a tendency to focus on only the buyers and sellers of the product,” Lautz said. “However, these numbers show that marijuana has been a boon to commercial real estate.”

The business of marijuana has been booming for more than a decade. In states where it has been legalized in some capacity for at least three years, each had spikes in demand for commercial property. Additionally, those commercial properties that are in close proximity to marijuana dispensaries saw a jump in value – with 20 percent seeing an increase in value in states where it is legal for both medical and recreational use.

However, those who are leasing commercial property are finding new language in their leases that restrict growing marijuana on properties. Landlords are also passing on a lot of utility costs to tenants if the tenant was permitted to grow marijuana and for those tenants that regularly smoke marijuana in the property, 89 percent of them are paying for utilities.

While there have been increases in residential sales, as mentioned previously, there are other issues that have cropped up in areas where marijuana has been legalized.

Specifically, homeowner associations (HOA) are placing restrictions in their communities when it comes to growing or smoking marijuana in homes or common areas. Only three percent of respondents said that specific HOA’s are allowing for smoking or growing marijuana.

Only 25 percent of those who responded said they have tried selling a grow house, which is a small sample size, but within that group, 29 percent have indicated it is difficult to sell them – likely because of the smell or moisture-related issues.

Landlords are stingy with renters who are involved with growing marijuana. According to the data, approximately 23 percent of landlords said they are unwilling to accept cash for rent in any instance, while about 10 percent said they won’t take it if it came form an illegal federal activity. Despite the actions by some states, marijuana remains illegal under federal law, which categorizes it as a Schedule 1 drug.

Marijuana is often an all-cash business, therefore earnings from those who profit from marijuana are often in cash. This sometimes makes renting difficult in these states, as only 42 percent of landlords where medical marijuana alone is legal and 40 percent in states where both medical and recreational marijuana are legal said they would accept cash payments for rent.

“Landlords and HOAs are having to think about how marijuana is both used and grown within a home,” Lautz said. “It might be legal, but you still can run into issues. You may have restrictions on your ability to use marijuana in your home or in common areas.”

Almost half the respondents in states where medical marijuana is legal said they didn’t have a problem leasing a property after it was previously occupied by a tenant who legally grew marijuana. As for the states where both medical and recreational marijuana is legal, a range of 35-to-49 percent said there was no difficulty re-leasing those properties to new occupants.

“It’s a little too early to tell if there’s a universal decision on whether it’s good or bad for real estate,” Lautz said. “There’s no doubt it’s causing some complications.”