Sluggish Start To New York's Legal Weed Market Is Ready For A Spark

New York has issued 165 licenses to cannabis dispensary owners, but on the first unofficial marijuana holiday of April 20 with adult-use recreational sales allowed in the state, the places for smokers to legally get high are short supply. 

Just eight legal cannabis stores are currently in operation throughout New York state, according to the Office of Cannabis Management, far behind the goal set by Gov. Kathy Hochul of having 20 dispensaries open by the end of last year, with another 20 opening each month after that.

But the meager number of legal smoke shops open betrays the reality of the fight for space, especially on the streets of New York City. Real estate brokers active in the cannabis market say the competition for space has been blazing hot, with dispensaries paying above-market rents and tenants frequently entering bidding wars for space.

With the speed of leasing, brokers said they expect to see as many as 50 operating throughout the state by the end of the year. 

“I think it's going to continue to be very busy for the next three to five years, if not longer,” said Greg Tannor, a principal and executive managing director at Lee & Associates. 

“We speak to these individuals on a daily basis, and the calls that come in saying, ‘Hey, I just won my license,’” he added. “The momentum is really picking up.”

Rents have increased over time, Ripco Real Estate Senior Associate for Retail Leasing Ben Davis said. He said his team leased a retail space to a cannabis tenant in September 2021 for $900K in annual rent, but that figure could reach $1.4M in today’s market. 

“There's a space in SoHo and they're asking $25K or $30K a month,” Davis said, adding that he believes that space is an outlier. “But now they want at least $45K or $50K a month for a cannabis user.”

Landlords’ perception of the risks — their tenants are selling a Schedule I substance under federal law — is one factor pushing up the asking rents on dispensary spaces, brokers said. That hasn’t changed as cannabis has been legalized in more states — between 80% and 84% of landlords are still uninterested in leasing to marijuana tenants, according to a survey from the National Association of Realtors released this week.

Other tenants in the building or nearby are also a concern — almost 40% of commercial landlords in states where medical and prescription marijuana was legalized before 2018 found that some tenants don’t want to be near a dispensary, according to the NAR survey.

In New York, location restrictions on cannabis stores, such as needing to be 500 feet away from schools or religious establishments, are adding to competition for space and to price. Although brokers’ new understanding that smoke shops can evade the 500-foot rule if they find locations within mixed-use buildings — effectively mirroring the approach of bars serving alcohol — is opening up more locations, space remains limited.

Altogether, those factors are pushing prices for space up by roughly 20% on average, brokers told Bisnow.

“Let's say if we got 10 leases done, we'll probably be in a bidding war out of six out of the 10,” said Colby Piper, director of cannabis real estate at Ripco. “Activity has picked up tremendously over the last, let's say, six to eight months.”

In another 15% of cases, the landlord will pretend that other tenants are interested in the space to increase the price because of the risk that still comes with leasing to cannabis tenants, Piper said.

“It's federally illegal, and at any given point, the Feds can come and seize their property,” he said. “It's a brand new industry and they don't know how to relate it to anything else. And then also the negative stigmatism behind the plant — you know, they think we're glorified drug dealers.”

A key wrinkle in the market that has persisted is the pesky proliferation of shops that are illegally selling cannabis. Roughly 1,400 illegal smoke shops are currently operating in NYC, per an estimate last month from the NYC Sheriff's Office reported by The City.

The long-anticipated crackdown on NYC’s illegal market has yet to arrive, even after Manhattan District Attorney Alvin Bragg and New York City Mayor Eric Adams issued written warnings to 400 illegal smoke shops in Manhattan that they would be fined, evicted and have their product confiscated.

But even with the competition from illicit cannabis dispensaries, the size of the opportunity for licensed smoke shops is huge: Revenues for the legal stores are hitting $100K a day, Piper said. Between the business opportunities and the state’s push to get more legal stores operating quickly, Lee & Associates Senior Leasing Associate Jessica Gerstein said that leasing is now moving much faster than a year ago. 

While retail leases typically take three to four months to negotiate, Gerstein said the push to open means landlords and tenants are both moving fast. The flip-side, however, is that some stores are setting up to operate as pop-ups and will need to close at a later date in order to complete more proper fit-outs.

“Our team have been talking to at least three or four new operators a day, on top of the ones that we're really working with currently,” she said. “Our phones have been nonstop.”