The Changing Economics of the Cannabis Industry

by | Aug 16, 2022 | Articles

The Cannabis industry is continuing to grow rapidly, with U.S. sales expected to reach $25 billion by 2025, encompassing the lion’s share of projected global revenue of $33.6 billion, according to a recent study by Statista.com. Cannabis consumers are expected to reach 50 million in this time. While more than ninety-one percent of adult Americans feel that cannabis should be legalized, according to a 2021 survey by Pew Research, the industry is still impacted by a confusing quagmire of excessive regulations and tax burdens that differ state-to-state. Access to capital is a make or break challenge for many, and Federal inertia and unwillingness to move legislation, suggest that fundamental change is unlikely to occur in this current administration.

During the last decade, growers have flooded the market with a glut of high quality product, leading to plunging wholesale prices. Chronic lack of access to low-cost institutional capital and high turn-over add to the challenges. Rising inflation, a changing tax environment and an ongoing game of political football has caused additional turbulence. Smaller operators who cannot generate adequate aggregate revenue and scale find it tough to survive. A handful of large multi-state operators (MSO’s) continue to make inroads toward consolidation of the industry. 

Most cannabis start-ups are financed by angel seed and other alternative sources of capital, such as cannabis REITs. These industry-focused REITs have provided the largest source of financing for cannabis real estate investment. California, which legalized recreational use in late 2016, is forecast to reach sales of 7.2 billion dollars by 2024. Illicit border trade and a crushing cultivation tax had been stifling the industry; however, promising change is underway. On June 30, California Governor Gavin Newsom signed Assembly Bill 195, bipartisan supported legislation that will eliminate the tax, provide new tax credits for some cannabis businesses and lower the threshold needed to pursue unionization. Industry experts say all of these measures are vital incremental steps to help stabilize the supply chain and industry.

Streit Lending has been a long-standing lending partner to the cannabis industry, providing direct access to capital for cannabis real estate financing. Noah Streit, Managing Principal of Streit Lending, counsels investors to come prepared with a well-thought out business plan and open mind when seeking funding.

“Having a strategy, a detailed plan and asking the right questions is important in the origination process. Our fingers are firmly on the pulse of this business, so we understand how to undertake the challenges and complexities from all angles. We consider ourselves as a trusted and informed financial partner to our clients.”

Cannabis investors continue to remain bullish on the industry, which may see a welcome softening in cannabis real estate lending in the coming year. Industry experts believe that the attractiveness and upside will attract non-cannabis REITs who will begin to build cannabis-related portfolios. Others, including credit unions and state banks may follow suit as legislation moves in favor of Federal legalization. In recent years, large commercial real estate brokers have developed in-house cannabis experts to help navigate regulations and facilitate brokerage deals across commercial real estate asset classes. The National Association of Realtors’ April 2021 report indicates that over a third of its members had experienced an increased demand in warehouses, retail storefronts and land in states where prescription and recreational cannabis is legal. Despite some uncertainties that still exist and challenges to face, the prognosis is positive for this continually growing market. 

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