Ask Our Experts, 8/12/2019
Q: For anyone who missed last week's webinar, "Are Your Numbers In Order? Preparing Your Cannabis Business for Turbulent Times Ahead", can you summarize what was shared?
A: Though we have seen considerable growth and increased legitimacy in the legal cannabis industry, many ancillary businesses are still trying to find their way. Last month, New Frontier Data and CohnReznick attended an Appraisal Institute Conference in Denver (July 23-24) to discuss cannabis-related opportunities in the appraisal industry.
In the emerging cannabis markets, there is a lot of speculation about land purchases, warehouse rentals, and business valuations. Many of the appraisers were trying to determine what types of opportunity exist in the cannabis industry, though others were more familiar with the industry and asked very detailed insightful questions. The consensus was that current property and rental appreciation in values will eventually subside and normalize.
After the conference, Andrew Lines of CohnReznick and Beau Whitney from New Frontier Data presented this webcast to share observations.
Among the key points expressed:
- Data plays a significant role in determining opportunities and identifying risk in cannabis-related, real-estate transactions.
- Cap rates initially in the 15% – 20% range will eventually normalize, similarly to how data center opportunities normalized as that market matured, and now are hover at the 6% level.
- It is important to think globally, but act locally: Local rules and regulations can have a significant impact on investment opportunities, or in eliminating them in certain geographical areas. Permits, fees, and land-use rules all add risk, complexity and costs.
- Investors need to understand how market trends and changing consumer preferences or product preferences can shift opportunities from one sector to another (e.g., agriculture to manufacturing or warehousing) very quickly.
- While cannabis businesses generally pay premiums to investors and landlords to account for risks, investors and owners need to beware pricing themselves out of the market; some may choose to build new rather than retrofitting.
- Maturity in the markets can play a role in profitability: Oregon is an example of how pricing commoditization can squeeze margins and opportunities, as prices there have decreased 63.6% since October 2016.
While there are a lot of complexities in the cannabis markets, there remain opportunities in the ancillary space. Examples from the conference and webinar offer positive signs about how other industries are beginning to see the light.
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