What a Medical Cannabis Tsunami is Doing to Real Estate

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Has Oklahoma overdone it? Since the legalization of medical cannabis in the state in October 2018, Oklahoma has seen a massive boom in its medical cannabis dispensaries. The state, with some four million people, has 1,964 medical cannabis dispensaries serving 183,795 patients according to Oklahoma Medical Marijuana Authority’s latest report earlier this month. By comparison, New Jersey, a state of 8.9 million people, has seven medical cannabis dispensaries serving an estimated 51,000 patients. 

According to J. David Chapman, who led a session called “Unintended Consequences of Marijuana Laws” at the 2019 Commercial Real Estate Summit in Oklahoma City on Wednesday, when you drive down the street in his city, Edmond, “it seems like every strip center, every other strip center, is going to have a dispensary.”

Chapman is an associate professor of finance and real estate at The University of Central Oklahoma and a member of the Central Oklahoma Commercial Association of Realtors. Cannabis Wire interviewed him to get his take on the real estate consequences in Oklahoma as medical cannabis dispensaries boom. This interview has been edited for length and clarity.

Yeji Lee, Cannabis Wire: To just start off, can you give us a rundown of the main points of your session at the summit?

J. David Chapman: In the presentation, the first thing I do is just talk about the situation. I mean, we’re right here in the middle of the Bible Belt. And frankly I think it was a surprise to a lot of people that the medical marijuana bill passed here. Secondly, not very many people know about cannabis here, the advantages, disadvantages, and where it’s legal and where it’s not. I’ll show them the possibilities, that it’s not going anywhere, that this thing is here to stay. So you can put your head in the sand if you want to—the owners of property, realtors, developers—but the truth is you need a policy, you need a strategy, because it’s here to stay.

Then I’ll get into Oklahoma specifically and its numbers. And this is where it gets a little bit alarming when you look at the numbers. Oklahoma ranks number one in the United States in the number of medical marijuana patients per capita. Even more surprising than that, we’re number three overall in patient count in the United States. We’re a little state and we’re number three. That begs the question: Are we really that sick? Is there some abuse going on? We don’t know the answer to that, but we are an oddity when it comes to the number of people participating.

Lee: The growth of dispensaries in Oklahoma has been unprecedented. Are they succeeding? 

Chapman: It’s early yet but we’re starting to see a stressed industry, we’re starting to see them shut down. What I don’t know is: are they shutting down because there’s a problem with the industry, or are they shutting down because there’s a problem with management? The really interesting thing is: they’re replaced with two with every one shutting down. So as soon as I say that it’s an industry issue, apparently they didn’t tell the new guy coming in, you know? I think that everyone thinks they can do it better than the guy before. It’s a lot like the yogurt places. You remember when yogurt first came out? And you go: “For crying out loud, we don’t need one in every strip center. How many people are going to eat yogurt?” Well, tons of them failed. There’s very few left today. You can look at several industries where that happened the same way. Did it go out because people were bad entrepreneurs or bad business people? Or was it a problem in the industry? My guess is that it was a little bit of both. 

In the end, a dispensary is a retail operation. A lot of these businesses are ignoring car counts, locations on corners, locations being parallel to roads and not perpendicular. And they’re ignoring all that partly because there’s no place for them left to go. A lot of landlords won’t allow them because they’re scared of the industry and there just aren’t a lot of small square footage operations looking for tenants.

Lee: Are the leases that these cannabis businesses are signing long-term leases? 

Chapman: Well, it’s all over the map. Currently what I’m seeing is a lot of these dispensaries are going into small spaces. Most of the people that represent small spaces are less sophisticated, their leases are less sophisticated. 

Lee: How easy or difficult is it right now for a cannabis dispensary to get a space? How easy is it to get landlords on board with a cannabis-related business? 

Chapman: I think it is an issue. I know for a fact that they’re paying more than market, but I also know for a fact that they’re offering more than market. They’re not always very good negotiators. In other words, instead of explaining to landlords their credit competency, how they plan to do this business, and showing their financials, they just want to throw money at it. So it makes it look like, to the real estate industry, that these guys just have a ton of money, which may be the case, but what I would recommend to landlords is to look at different lease options. 

I think you ought to have early termination rights, events that trigger different things, and you may want to include a clause that would allow immediate eviction if there was a federal prosecution or something like that. I think you need additional addendums with provisions for inspections. And I think there is some justification for these leases being a little more expensive since they’re higher risk. I think a lot of the times, these dispensaries just want to get in there and they want to get started quick, so I think it’s costing them money. I get this sense when I’m on the phone with [these dispensaries who are looking for retail space] that they feel pressured to get going because they think maybe there’s this window of opportunity and if they miss this window of opportunity they’re going to miss out on this business. But there may be some truth to that. Who knows? 

Lee: For grows, in terms of ventilation and water and other factors, is the real estate market adapting to these needs or is there a disconnect between what businesses are saying that they need and what the property owners are willing to give? 

Chapman: There are some issues. One of them is the smell. The skunky aroma… we’re starting to see a lot of complaints about it from neighbors. I think that’s one thing that landlords will have to figure out. We do have systems now that we can use to neutralize that distinctive aroma. So we need to have these systems in place and they can be expensive. We have really intense lighting and electric use [among grows]. So one of the things we really want to advise property owners and growers on, particularly in grow operations, is that you need to understand the specifics of the business. The good news is that they can use a lot of really bad real estate that isn’t being used for anything very productive. But I do think most of those buildings are not going to have proper electric, proper watering systems, and we need to have things that monitor mold, the smell — to neutralize it — and they’re going to have to be prepared to have the cannabis operation pay for the tenant improvements. 

Lee: Has there been ample preparation for these considerations so far in the grows that have already popped up?

Chapman: Yes, I think so. We [the real estate industry] are getting it pretty quickly. What we’re going to do at the summit is say, “Here are the issues and here are the ways to deal with them. You can choose to not get involved in the industry if you want. But [if you do], you need to manage your risk and here are the factors.”

Lee: Given this huge growth in dispensaries, would you say that this is the industry that’s filling up most of the properties right now?

Chapman: Oh yeah. If you look at transactions, by far, the dispensary is leading the category in retail. We’re doing more leases on dispensaries than anything else right now. But there’s that old saying, “live by the sword, die by the sword.” We’re oversaturated by dispensaries so there’s going to be some fail and some of this space is going to come back on the market.

Lee: Are there any trends in Oklahoma when it comes to cannabis—something uniquely Oklahoma—that you don’t see anywhere else?

Chapman: Yes. Just the absorption of small real estate property. We’re just a little bit concerned for the sustainability of all these operators. We want them to be successful, right? As an industry, real estate, we’re only as successful as our tenants, and so we want them to be successful, but we’re concerned that they all can’t be. Especially because they’re really starting to compete hard against one another. The level of competition here, we’re seeing raised to a new high. 

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