Does it matter for value if there are a few legal marijuana grow operations in the neighborhood? That’s not really a question we asked much in the past, but it’s definitely a reality in many portions of California now since recreational marijuana was approved at the ballots last year. I know this is a polarizing topic, but legal cannabis cultivation is something we have to pay attention to now in real estate – regardless of our personal views. Today let’s look at a specific situation I encountered a few weeks ago and consider a few takeaways.
Not an advocate: Just to clarify, I am writing for the sake of analyzing real estate trends. I am not a cannabis advocate in any way and this post is not about whether marijuana is good or not for society.
If you didn’t see in the SacBee, there are now 108 locations within the City of Sacramento with a commercial cannabis permit in process. This means there are at least 108 planned legal grow operations. The largest cluster is in an industrial section off Power Inn Road, but there are quite a few in North Sacramento too.
The situation: I appraised a house on Eldridge Avenue in Sacramento a few weeks back and I discovered there are three commercial cannabis cultivation permits on file with the city one street to the south. This is a residential area, but it’s next to industrial properties.
On Kathleen Avenue there are residential homes to the north and the “green zone” to the south. In many cases commercial grow operations will be far from residential homes, but not in every case as seen below.
Three things to consider about legal cannabis cultivation:
1) Neighborhood trends: Part of knowing the market and being a real estate expert is being in tune with what is happening in the neighborhood – even in the commercial sector. If you haven’t bookmarked the SacBee cannabis map, I recommend doing that. You can also see where marijuana dispensaries are located here.
2) Disclosure: Anyone who works in real estate needs to consider what disclosure looks like when we find out about cannabis grows nearby. I won’t tell anyone what to disclose or how to do it because that’s not my role, but knowing about commercial cannabis grow operations might be a good place to start. This is especially true in a situation like the one above where one side of the street is residential and the other side is industrial. This is a conversation that each appraisal firm and brokerage ought to have as the legal cannabis industry emerges. In my appraisal report on Eldridge Ave I simply disclosed my knowledge of three cannabis cultivation permits one street south of the subject property. Remember, it is illegal to have a commercial cannabis operation in a residential home, so disclosure is probably something we’ll think about more when there are nearby industrial properties. Moreover, it is only legal to grow commercially in the City of Sacramento as most other areas including Sacramento County have said NO to legal commercial grow operations (for now).
3) Value impact: Over time we’ll have to ask if there is a value impact due to proximity of cannabis cultivation businesses. Right now this is all so new and we are only seeing the beginning of an emerging industry take root in Sacramento. Keep in mind there are very strict guidelines for these businesses, and the City of Sacramento is putting rules in place to ensure neighborhoods and areas don’t “go to pot” so to speak (pun intended). There are rules for security, safety, proximity to schools, and even odor. In many cases these businesses could operate without any visible evidence at all. Though if there does end up being a problem with odor, crime, or stigma, then that’s something we’ll have to watch and consider. On a side note, it seems many of these grow operations so far are located in areas with lower property values. To be fair there may be more industrial properties in these locations, but this is still something to watch closely.
4) Other: What is #4?
Cannabis class I’m teaching: By the way, I’m teaching a class at SAR called “The emerging trend of marijuana in real estate” on August 30. I’ll talk for 60-75 minutes about zoning, land value, disclosures, etc… More details here.
Questions: Do nearby cannabis businesses need to be disclosed? What do you think we need to look for to know if there is any impact to value? Anything else to add? I’d love to hear your take.
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If you didn’t know, sales volume last month was the strongest May we’ve seen over the past 4 years. But don’t get too excited because sales volume for the entire year is about the same as last year. No matter how we look at it, price metrics are up 7-9% from 2016 and they increased by 2-4% last month. One of the themes that won’t go away is we have a shortage of housing. In fact, housing supply is 22% lower right now compared to last year, and it’s been putting pressure on values to increase – particularly at entry-level price ranges. The tricky part lately is many contracts are getting bid up due to multiple offers (even beyond a reasonable appraised value). This can favor sellers accepting offers from buyers who have more cash to make up the difference between the appraised value and the contract price, though FHA sales stats show first-time buyers are still finding ways to close deals. In higher price ranges the market feels much softer, though we are still seeing multiple offers when properties are priced correctly. This is a good reminder that it’s possible for the market to feel more aggressive than actual value increases. In other words, having multiple offers doesn’t mean values are increasing rapidly or at all. Lastly, we are starting to hear more about lenders rolling out 100% financing to help buyers artificially afford higher prices (sounds healthy, right?). I could go on and on with words, but let me share some graphs to show the market visually.
