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May 3, 2021 Deal Watch

Legal pot will boost commercial real estate demand, but how much will depend on zoning

Photo | Contributed Fine Fettle dispensary has boosted safety measures during the COVID-19 pandemic, including requiring workers to wear face masks.

In Rocky Hill, CTPharma Solutions recently invested more than $15 million to acquire and outfit a 216,000-square-foot marijuana growing facility, following expansions by several of the state’s other licensed growers over the past two years.

The producers are building capacity to meet the growing needs of the nearly seven-year-old medical marijuana program as it adds more qualifying medical conditions, but they’re also positioning themselves for the potential legalization of adult-use recreational marijuana, which is being weighed by state lawmakers.

Advocates of a recreational marijuana industry say it would catch the state up with its neighbors, produce tens of millions of dollars in tax revenue and start to make amends for some of the racial inequities of the decades-long war on drugs.

It’s also clear the state’s commercial real estate market stands to benefit.

The legalized pot industry could serve roughly 200,000 paying customers who live in Connecticut, experts predict, which is four times the number of qualified medical marijuana patients.

That demand will require more growing capacity and retail dispensaries. Brokers say they expect demand for real estate — both retail/commercial and industrial properties — to increase.

Higher vacancies brought on by the COVID-19 pandemic have changed the retail landscape, and industrial properties, though hot, are far more plentiful than the Amazons of the world can absorb.

Luke Massirio

“It’s going to help those retail locations that are empty right now,” said Nicholas Morizio, president of Colliers International’s Hartford and New Haven offices, who has worked on medical marijuana grower and dispensary deals in recent years.

Luke Massirio, a commercial broker with O,R&L in Rocky Hill, said he’s been getting calls from out-of-state marijuana operators in recent months, after a long lull.

“It’s funny because back in 2018, I want to say, we would get calls every week from these people up in Massachusetts because I think they had the impression the bill was about to be passed and it never happened,” Massirio said. “I think people were expecting Connecticut to get on board a long time ago and the calls kind of withered out, but now they’ve picked up a bit.”

Massirio said there’s plenty of industrial inventory for marijuana operators to shop, despite logistic-related demand that’s continued to flourish during the pandemic.

“There are a lot of old machine shops that sit and they’re not useful to a lot of companies anymore,” he said. “I think some of those buildings are going to be scooped up by some of these cultivators.

“Of course, I don’t know what the regulations will be,” Massirio added.

Land-use policies

The anticipated boost to commercial real estate is tough to measure with any precision, as no currently proposed legislation hints at how many additional dispensary and grower licenses might be issued by the Department of Consumer Protection (DCP), which oversees the medical marijuana industry. There are currently four growing facilities and 18 dispensaries across the state. Industry operators and other experts predict the number of dispensaries will grow by three-fold or more, based on assumed demand.

Medical marijuana grower CTPharma Solutions recently relocated to a larger facility in Rocky Hill so it can expand its capacity.

House Speaker Matt Ritter (D-Hartford) recently put the odds of recreational marijuana legalization this year at 50%.

Also crucial will be what powers are granted to municipalities to regulate and restrict the facilities, and what zoning changes they ultimately make.

The Connecticut Conference of Municipalities (CCM) has been lobbying for as much local control — and as much local revenue from cannabis sales — as possible.

Brian O’Connor, CCM’s director of public policy, said a majority of towns have made no marijuana-related zoning changes as of yet, but predicts that activity will ramp up if legalization happens.

Brian O'Connor

“Some towns might want them in retail areas to bring people downtown where others will want to relegate them to industrial zones,” O’Connor said.

Rep. Steven Stafstrom (D-Bridgeport), co-chair of the Judiciary Committee that approved a modified version of Gov. Ned Lamont’s legalization bill in early April, said he hopes that whatever legislation ultimately passes, cities and towns have plenty of zoning control as well as financial incentive — in the form of local tax revenues — to want cannabis facilities within their borders. Plus, local officials should be more accustomed to the idea of legal pot businesses, since the state’s medical marijuana program launched back in 2014.

“There was definitely a fear among some towns when the medical dispensaries went in, but that has, I believe, largely proven to be unfounded,” said Stafstrom, who is also a lawyer at Pullman & Comley.

Asked how many additional licenses the state might need if marijuana is legalized, Stafstrom said it’s best to leave that decision up to DCP.

“My general belief is that level of detail should not go into the legislation,” he said. “It’s tougher to amend down the road if we get the number wrong.”

Competitive landscape

The number of licenses granted by the state is a crucial factor for existing and future investors in the industry, according to Ben Zachs, chief operating officer of Connecticut and Massachusetts dispensary operator Fine Fettle.

He said some states — like Oregon and Colorado — have granted too many licenses, which has diminished the return for some investors who put their money in with stars in their eyes.

“What ends up happening is the lower-capitalized businesses end up failing and guys lose the shirts off their backs,” he said. “It’s not a cheap business to get into, there are lots of regulations, you need a lot of employees, you need to build an enormously beautiful and expensive vault.”

Fine Fettle has lobbied state lawmakers to grant adult recreational and medical marijuana hybrid licenses to the owners of existing dispensaries, then a round of 18 more licenses to minorities and other social equity applicants impacted disproportionately by the war on drugs, and a final round of 18 licenses open to any bidder, resulting in 54 total adult-use dispensaries.

Zachs said he is also convinced that growers will have a hard time meeting the new potential demand for cannabis.

“There is absolutely not enough supply to support an adult-use market in Connecticut right now,” he said.

A spokesperson who represents the four growers did not respond to a request for comment for this story.

Fine Fettle says its dispensaries in Newington and Willimantic could be converted fairly quickly to accommodate an influx of recreational pot users. It’s not clear whether most other dispensaries are similarly ready, or whether they would be in the market to lease or buy bigger properties.

Though many feel legalization is as close as it’s ever been in Connecticut, there’s still uncertainty, and putting properties under agreement can get costly, especially if things don’t go as quickly as hoped, Zachs said.

He points back to several years ago, when the state doubled the number of dispensary licenses, which prompted speculation — and perhaps speculative property deals — that producer licenses might be forthcoming.

“For two or three years, some people may have held onto real estate and not seen it come to fruition,” he said. “You’re paying $60,000 a year for the right to potentially apply for a license without knowing if the town’s going to approve it? It’s easier said than done.”

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