YL Small Group Discussion Series #3 “Cannabis and its Elevating Effect on Real Estate”

ULI Chicago Young Leader’s hosted their last session of a three-part Small Group Discussion Series, “Cannabis and its Elevating Effect on Real Estate.”  Guest Speakers included: Marty McDonnell, Senior Vice President of Development & Construction, Cresco Labs and Mitch Kahn, Co-Founder, Grassroots Cannabis and Chairman, Frontline Real Estate Partners.Just a few years before the first Chicago marijuana dispensary opened in 2020, speakers Mitch Kahn and Marty McDonnell had already been introduced to the industry of cannabis operations and real estate.

Marty joined Cresco Labs with less than eighty other coworkers and has seen the company become public while growing to employ more than 1500 employees in just under two years.  Mitch and his partner at Frontline Real Estate were looking for fresh ideas when they started a dispensary operation in 2014.

“It was like the wild west”, both agreed in regards to the first years of medical marijuana licensing in Illinois.

During the discussion, Kahn and McDonnell demonstrate the impacts on supply and demand from cannabis legislation and how that affects site selection, financing opportunities, and development requirements. With a limited amount of dispensary licenses in the state of Illinois, both Real Estate investors and cannabis operators must balance political risk – if Illinois brings more licenses to the market (a likely scenario), operators would much rather have a smaller footprint in urban environments rather than a large footprint in a setting like a suburban big-box store. Furthermore, because traditional debt markets are unavailable to operators, sale-leasebacks have been a popular way to get cash in the door. Kahn and Marty agree that this can be a risky bet for Real Estate investors when weighed with the possibility of new legislation. In terms of development, cultivation facilities are much more difficult to build when compared with retail stores. This is further driven by the current economic life-cycle of the cannabis industry: lack of supply creates a huge demand for cultivators, while operators are free to bring their product to market however they want – consumers don’t really care at this point.

The speakers both touch on the operations side of the cannabis industry. There are four places operators can be located – agricultural, processing, branding and retail. These can be vertically integrated depending on state laws. Both speakers agree that the ROI as an operator has been crazy due to the heavy demand. However, the upcoming election can play a big role in reducing demand.

Summary written by Montgomery Turner, Development Manager, Project Controls, AJ Capital Partners