Prospect of legalizing weed in Illinois has developers, landlords seeing green

After Illinois legalized medicinal marijuana in 2014, Deena Zimmerman traveled to Colorado to learn how the marijuana industry was intersecting with the real estate market.

The vice president at commercial brokerage SVN visited a town on the outskirts of the Denver metro area, a once-rundown place “where the tumbleweeds were rolling,” she said.

“Now it’s thriving,” Zimmerman said. “There’s cool apartments, cool retail. But cannabis came first.”

Gov. J.B. Pritzker already signaled his strong support for legalizing recreational marijuana and powerful House Speaker Mike Madigan says he is on board. While draft legislation has been proposed, the state Legislature has not formally taken up the measure.

What is clear, industry experts say, is that the law would be a boon to the real estate industry.

Legalized recreational weed would particularly benefit Chicago’s hot industrial market and it could help areas that have missed out on the city’s recent warehouse development and leasing boom. That is if the pitfalls of a nascent industry that’s still illegal at the federal level can be overcome.

“Industrial is really hot right now,” Zimmerman said. Legal marijuana “is going to to put it over the top.”

A new demand

Although recreational marijuana legislation is still in its infancy, Illinois lawmakers already released an outline of what a recreational marijuana industry could look like. In the proposal, possession of up to 30 grams of pot would be legal, local governments could opt out of the new law and landlords could restrict or ban the use or cultivation of marijuana on their properties.

Because the product cannot be transported over state lines, marijuana would have to be grown in-state. And it would have to be sold from dedicated retail storefronts. Where it can be grown and sold has yet to be determined, but that decision will play a huge role in a marijuana-related real estate market, sources said.

The Chicago-area industrial market is experiencing highs not seen in years. A new industry that needs ample room for growing and storing could contribute even more demand.

“I think there’s about to be a pretty big boom here,” said Tim McGraw, CEO of California-based Canna-hub, a development firm focused solely on the marijuana industry.

Industry players from around the country have taken notice.

McGraw founded Revolution Enterprises, one of the the first companies to receive a marijuana growing license for Illinois’ nascent medicinal program. He spent 38 years in the state, but left in 2016 for California, which legalized marijuana two years later. Property values have risen in some areas of Los Angeles County because of high demand from cannabis industry tenants and low supply of landlords willing to work with the industry.

McGraw saw an opening in the California market. There he has developed two “cannabis hubs,” or industrial parks specifically for marijuana growers. Canna-hub is one of only a few marijuana property developers in the country, he said.

Like California, Illinois has a large warehouse industry that will help determine where marijuana growers initially set up. Growers will likely be priced out of the hottest parts of the Chicago market, thanks to rent premiums, plus accessory costs like security and insurance.

In Denver, a third of the marijuana industry is within older Class B properties, white the rest is in the least in-demand Class C facilities, according to a 2017 CBRE study of the Denver market. None are in high-end, Class A buildings.

Chicago growers likely would put down roots outside the city to save money, market pros said. For his medical marijuana business, McGraw chose to open Revolution Enterprises’ grow facilities in Barry in southern Illinois, and a 75,000-square-foot growhouse just south of Peoria in Delavan, population 1,700. Cresco Labs, one of the biggest medical marijuana companies in the state, chose Joliet and Kankakee for its grow locations — towns much larger than Barry or Delevan but still a distance outside Chicago.

In addition to the high costs in a place like Chicago, McGraw added, “there’s typically more bureaucracy in a big city, so why would you want to deal with it?”

Who will cash in?

Local ordinances and zoning laws will also be major factor in determining where marijuana facilities can set up.

Pot operations will not be able to open up shop just anywhere, said Chris Tecu, a principal at Avison Young in Chicago who worked in Washington state around the time recreational marijuana was legalized there in 2012. Even more than market factors, local laws and zoning codes will dictate where the industry sets up, he said.

“In most states, grow houses are in heavily industrial areas,” Tecu said. “You go to Seattle, they are in down-and-dirty industrial parts of town.”

Cities and counties almost certainly will be able to opt out of any measures legalizing marijuana in Illinois, which will restrict where growers can set up. Even in the areas that do allow for the new industry, zoning laws likely will place limitations.

That means that a number of landlords could get really lucky. If they are in a town that allows for marijuana growing and if their property is correctly zoned, they could see huge demand, Tecu said.

Zimmerman added, “I think it’s an opportunity for these secondary industrial markets. More people will be paying attention to them now.”

Depending on how big Illinois’ marijuana business grows, demand could be fierce. It will likely benefit established real estate players who can accommodate growers from a legal and logistical standpoint, McGraw said.

That demand — and the fact that landlords are leasing to a company dealing in a product that the federal government still classifies as a controlled substance — means landlords can charge more to marijuana companies. McGraw said some landlords are able to get three times the rent they would normally charge.

In Colorado, marijuana-occupied industrial properties sold at a 25 percent premium over other comparable properties, according to a report in Pensions & Investment.

Given that industrial landlords can rent to marijuana growers at a premium then sell their property at a markup, industry experts sayinvestors will soon want in on the action. But McGraw said Illinois is unlikely to see much speculative marijuana-related development. That’s because the licensing and permitting process for growers is so cumbersome and bureaucratic, it’s hard to know which tenants will be looking for space, and when they will need it.

Who will get in the game?

Working with the marijuana industry will be enticing to brokers and developers, but not everyone is on board for what has historically operated as an all-cash business.

The finances are changing, but the drug’s status on the federal level remains too daunting for some traditional investors.

“The institutional guys, most won’t touch legal or medical marijuana,” Tecu said. “If I’m head of leasing, I’m not putting my neck on the line to lease to someone making a Schedule 1 narcotic. There’s just too much risk.”

When helping her medical marijuana industry clients find either industrial or retail space, Zimmerman said landlords refuse about 90 percent of the time. She said they are deterred by the all-cash nature of the business. They are also concerned about skeptical neighbors and local politicians who might not approve.

“There is that stigma that we’re going to see for a bit,” she said.

But if traditional lenders won’t get in the game, there are others who will.

Real estate investment trusts have become an increasingly big player in the marijuana-related business. And in 2017, the country’s lone publicly-traded marijuana REIT, Innovative Industrial Properties, was the top-performing REIT. It earned a 117-percent return over that time.

In late December, Innovative Industrial acquired its first property in Illinois, paying $19 million for Revolution Enterprises’ facility in Barry. The REIT will invest $6 million into the facility as Revolution eyes an expansion.

California’s massive marijuana industry is drawing a number of new and institutional players to get in the game. In August, Beverly Hills-based Inception Companies announced the launch of a $50 million REIT aimed at the marijuana industry. Pelorus Equity Group, a Newport Beach-based investment firm, in September launched a $100 million fund targeting marijuana-related real estate ventures.

With Illinois apparently on the cusp of legalizing recreational marijuana, landlords and real estate investors should start thinking about their game plan, Zimmerman said.

“I think owners should get on board, because space is going to be at a premium,” she said. “You can really make a premium on this, because that’s what it’s going to cost.”