The cannabis industry is cautiously optimistic about a potential real estate windfall following the Drug Enforcement Administration's plan to reclassify marijuana under the Controlled Substances Act, but real estate experts and owners warn that any big changes could take time to materialize.
Cannabis lenders like Chicago Atlantic Real Estate Finance (Nasdaq: REFI) are cautious about how quickly the policy changes could realistically play out. While the DEA's move marks a loosening of marijuana's strictest legal status, the reclassification to Schedule III would maintain the substance's illegal classification under federal law.
“We don't expect anything to change in terms of announcements over the next 18 to 24 months,” Chicago Atlantic Chairman John Mazarakis warned during the company's first-quarter earnings conference call.
Why? “The schedule change is just a first step. Nothing has been accomplished yet,” he noted.
Mazarakis said further regulatory changes would likely be needed, rather than just a rescheduling, for cannabis lending businesses to face disruption from new competition entering the industry, and the industry would not be safe beyond the 24-month period, as pricing and competitive pressures could come “in a more speculative way.”
California-based Innovative Industrial Properties Inc. (NYSE: IIPR) also expressed hope that rescheduling to Schedule III would keep the federal and state legal conflict largely intact in the short term. IIPR President and CEO Paul Smithers said during the company's first-quarter conference call that under Schedule III, state operators “will still be running afoul of federal law. … They will be selling cannabis without a prescription.”
The rescheduling further boosts the REIT's prospects by “creating momentum to put it in a position to deschedule, probably within the next two to three years,” Smithers said.
The cannabis real estate industry has been eager for developments that would allow operators access to capital and expand their operations, but as the industry works through the DEA process, a more cautious wait-and-see assessment appears to be taking hold regarding how much of a change in timeline will actually bring about.
Daniel Tropp, president of industrial real estate brokerage AEBOV, outlined several key potential impacts, one of which is how the schedule change will affect cannabis research.
Tropp said relaxing regulatory hurdles could spark a wave of cannabis research and increase demand for lab space in hospitals, universities and life science facilities, but noted that it's uncertain whether there will be a surge in new labs anytime soon, given the limited number of facilities currently researching other Schedule III drugs.
Another consideration is the role the Food and Drug Administration will play. It's unclear whether the schedule change will lead to the FDA expanding its oversight of cannabis manufacturing facilities, but Tropp said it could increase compliance costs and affect “demand for manufacturing space” and prices.
The influx of capital could also encourage operators to “verticalize” and seek additional licenses and facilities. Increased investment “should lead to increased demand” for industrial real estate suitable for cultivation, manufacturing and retail space.
As a result, Tropp said the potential real estate benefits of rescheduling through research needs and reinvestment of tax savings “may outweigh the headwinds of increased costs to manufacturers due to increased FDA involvement.”
Meanwhile, cannabis lender AFC Gamma's (NASDAQ:AFCG) plan to spin off its commercial real estate lending unit into Nasdaq-listed REIT Sunrise Realty Trust is “on track” to close in mid-2024, President Robin Tannenbaum confirmed this month. On the conference call, Tannenbaum noted that a “significant decline in available capital” from traditional lenders creates an attractive opportunity.
“We remain excited about the set of opportunities we are seeing in commercial real estate lending,” she told investors and analysts.