Florida's cannabis market has consistently proven to be one of the strongest in the nation, prompting operators to expand their presence in the state. Cannabis dispensaries, a niche market, have long been an intriguing investment opportunity for commercial real estate investors. Over time, these dispensaries have demonstrated resilience against economic downturns and pandemics, resulting in fewer vacancies.
Given past market conditions of low-interest rates and high transaction velocity, in combination with the expansion of cannabis operators in 2022, we have witnessed a significant increase in the number of dispensaries being traded in Florida. However, financing properties with cannabis operators as tenants remains a major obstacle for many investors. Despite this, 1031-exchange buyers making all-cash purchases have increasingly turned to cannabis dispensaries as a reliable asset class.
Q1 2023 Overview
Despite Florida's enduring appeal as a prime real estate market, recent market conditions have resulted in a decline in transaction velocity. According to data from CoStar Group Inc (NASDAQ: CSGP), during Q1 of 2022, 3,757 properties in Florida traded at or above $500,000, while in Q1 of 2023, only 1,840 properties in the same price range were traded. This represents a substantial year-over-year decline of 51 percent in transaction velocity.
However, in contrast to this decline, cannabis dispensaries in Florida have performed remarkably well as an asset class. In Q1 of 2023, they experienced a comparatively modest decline in transaction velocity of 28 percent, with the average cap rate of a cannabis dispensary trading at 6.50 percent, which is a nine basis point increase from 6.41 percent in Q1 of 2022.
The slowdown in cannabis dispensary transactions can be attributed to several factors. One of the main reasons is that the Federal Reserve has …