The cannabis industry is cautiously optimistic about a potential real estate windfall following the Drug Enforcement Administration’s plan to reschedule marijuana under the Controlled Substances Act. But property experts and owners warn that any significant changes could take time to come to fruition.
Cannabis lenders like Chicago Atlantic Real Estate Finance (Nasdaq: REFI) are taking a measured view on how quickly the policy change could realistically unfold. While the DEA’s move signals an easing of cannabis’s most restrictive legal status, rescheduling to Schedule III maintains the substance’s federally illegal classification.
During the company’s first-quarter earnings call, Chicago Atlantic Executive Chairman John Mazarakis warned that he doesn’t “expect anything to change with respect to the announcement for another 18 to 24 months.”
Why? Rescheduling is “just the first step. Nothing has really been accomplished yet,” he noted.
Mazarakis said more regulatory changes would likely be needed beyond just rescheduling for his cannabis lending business to face disruption from new competition entering the space. And the industry won’t be in the clear after the 24-month period, as pricing and competitive pressures could emerge “on a more speculative basis.”
Maryland-based Innovative Industrial Properties Inc. (NYSE: IIPR) echoed the expectation that rescheduling to Schedule III keeps the federal-state legal conflict largely intact in the near term. IIPR President and CEO Paul Smithers said on that company’s first-quarter call that even under Schedule III, state operators “would still be in conflict with federal law. … They’d be selling cannabis without a prescription.”
What rescheduling does, according to Smithers, is it “creates that momentum to get to a descheduling position maybe in the next two to three years,” which would further boost prospects for the REIT.
The cannabis real estate sector has been desperate for developments that could open up capital access and expansion for operators. But as the industry digests the DEA’s process, a more prudent wait-and-see assessment seems to be taking hold regarding how transformative rescheduling alone will be in practice.
Daniel Tropp, president at industrial real estate brokerage AEBOV, outlined a few key potential implications. One is rescheduling’s impact on cannabis research.
By easing regulatory hurdles, Tropp said rescheduling “could spark a wave of cannabis research, generating increased demand for research spaces” at hospitals, universities and life science facilities. However, he noted the current number of facilities studying other Schedule III drugs appears limited, so an immediate spike in new research sites is uncertain.
Another consideration is the role the Food and Drug Administration may play. It’s unclear if rescheduling would give the FDA expanded oversight of cannabis manufacturing facilities, which Tropp said could add compliance costs that would affect “demand for manufacturing space” and pricing.
The influx of capital could also spur operators to “go vertical” and pursue additional licenses and facilities. That increased investment “should result in stronger demand” for industrial properties suited for cultivation, manufacturing, and retail spaces.
As a result, Tropp said rescheduling’s potential real estate upside from research needs and reinvestment of tax savings could “outweigh the possible headwind of higher costs to manufacturers” from greater FDA involvement.
The post Cannabis rescheduling’s potential real estate reverberations appeared first on Green Market Report.
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