📉 Cannabis is crashing. How it impacts CRE.

👋 Hello, Best Ever readers!

In this week’s newsletter, cannabis crashes, the Midwest thrives, and we help keep syndicators out of jail.

Today’s edition is brought to you by the all-new Best Ever Community, an exclusive, private network for serious investors that officially launches tomorrow! Only a select group will be the first to gain access.

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Let’s CRE!

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CRE HEADLINES

🧢 Raising Caps: FHFA is increasing Fannie Mae and Freddie Mac's 2025 multifamily loan purchase caps to $73 billion each, totaling $146 billion in market support, a 4% increase from 2024. Workforce housing loans remain exempt.

🤖 Algorithm Wars: As the Justice Department pursues a price-fixing suit against RealPage affecting three million apartments, San Francisco and Philadelphia have banned algorithms using private data to set rents, with more cities following suit.

🏭 Industrial Woes: As industrial vacancy rates climb to 7.3%, tenants are taking twice as long to close deals vs. 2020, slowing leasing activity dramatically with only 30% of property tours leading to signed leases.

🎈Rentflation Continues: The Fed warns that housing inflation won't normalize until mid-2026, despite falling new rents. With shelter driving half of October's CPI increase and fewer people moving, the lag in rent data could delay Fed rate cuts.

🎙️ Stay Out of Jail: Real estate syndicators face heightened legal risks as the SEC considers raising accreditation requirements and cracking down on securities violations. Mauricio Rauld, founder and CEO of Premier Law Group, joined Matt Faircloth on the Best Ever CRE Show this week to discuss what it means.

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CANNABIS IS CRASHING: HOW IT IMPACTS CRE

Colorado's cannabis market has been booming for more than a decade. So has the real estate to support it — not just retail, but the warehouse and industrial spaces that host greenhouse and grow facilities. 

Now, the industry is crashing, with overall cannabis sales down from their 2021 peak of $2.2B to a projected $1.4B this year. Retail locations have remained stable, but cultivation facility licenses have plunged 28% since 2021, dropping 15% in 2024 alone. 

Key factors in its decline include:

• Tech Advancements: AI-driven hydroponics systems are dramatically improving efficiency, allowing growers to produce more with less — less water, fewer pesticides, and less space. This means retail locations can maintain inventory with far fewer grow facilities and mass storage, leaving warehouses mostly empty.
  

• Post-pandemic Recession: The pandemic created an artificial boom in cannabis demand, driven by stimulus checks and lockdowns. Growers rapidly expanded operations to meet demand, but when people returned to normal life and social activities, consumption plummeted. The resulting oversupply crashed prices, pushing many unprepared operators into crisis.

The Result: Denver's cannabis industry is seeing a mass exodus. Transfer-of-ownership applications have exploded from zero in 2020 to 63 in 2022, with another 50 expected in 2024. This surge in license transfers signals that cannabis operators are increasingly looking to exit the market rather than weather the downturn, with many headed to New York and New Jersey, where the industry is at an earlier part of its life cycle.

WHAT IT ALL MEANS

With no new entities being established and mergers consolidating the industry, warehouse and industrial property owners face painful choices: selling at significant losses or dealing with abandoned leases. And that’s if you’re in Colorado. If you’re in one of the 24 other states (plus Washington D.C.) where they’ve legalized recreational marijuana, even without the pandemic as a factor, what we’re seeing could be an indication of what to expect as the cannabis industry inevitably explodes — and contracts — in your market.

🎤 _{BEST EVER CONFERENCE}
FREE LIVE EVENT — TONIGHT!

Join us and some very special guests today, November 21, for a FREE live event — From Market Bottom to Boom: What to Expect from CRE in 2025.

Join Gerrit Van Maanen, John Chang, Neal Bawa, and Hunter Thompson for this roundtable discussion as they help experienced investors navigate the new era in store for commercial real estate in 2025.

👉 Register here to join us at 8 p.m. EST today, November 21.

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MIDWEST ELUDES MULTIFAMILY OVERSUPPLY

While the U.S. luxury apartment market faces oversupply challenges nationally, Midwest markets have eluded the trend. The Midwest’s modest construction pipeline has been consistently below the national average for more than seven years, allowing it to avoid the overbuilding that has plagued some Sun Belt markets. 

The result: generally low vacancy rates and above-average rent growth.

In its 10 largest markets, Midwest apartment YOY rent growth has paced above the national average, with Detroit (3.5%) leading the way and Kansas City and Cleveland (both above 3%) close behind. Even rent-controlled Minneapolis is keeping pace with national growth rates, demonstrating the region's rental market strength.

Meanwhile, half of the top Midwestern markets — Chicago, Cincinnati, Indianapolis, Kansas City, and Milwaukee — posted vacancy rates below pre-pandemic averages. With comparatively low vacancy rates and above-average rent growth, Midwest markets prove to be among the nation’s most balanced.

_{🏠 DEAL OF THE WEEK}
58% AVG ANNUALIZED RETURN AND 1.99X EQUITY MULTIPLE IN JUST 18 MONTHS

Ross McArthur and the team at Follow the Deal Investments realized a 58.16% average annualized return and an equity multiple of 1.99X in just 18 months on this Class C deal. Here's how they did it 👇

🏢 Property Details: This 18-unit Class C multifamily asset in Connersville, IN, was purchased in February 2023.

💸 Finances: The property was purchased for $791,820. The team invested $168,000 in capital and secured a $741,456 loan from a local bank at 7% interest, 18 months interest only.

💼 Business Plan: At the time of purchase, the seller self-managed and had a maintenance person living in one of the units. Rents were extremely low, with 38% vacancy (five units).

The plan was to remove delinquent tenants and raise rents to market rates. The goal was to refinance after stabilization in years two and three, pulling out original capital while maintaining strong cash flow long-term.

The majority of tenants ended up being delinquent, so the team eventually turned over 17 out of 18 units. During turnover, units were renovated, which included new LVP/carpet, paint, lighting, cabinets, vanities, and subfloors in some units.

💪 Biggest Challenge: The biggest challenges Ross and the team encountered on this deal were more delinquent tenants than anticipated and more renovations than expected, which led to a larger CapEx investment.

🍾 Results: The property was sold in August of 2024 for $1,175,000. The team sold because they were close to stabilizing and wanted to avoid putting more capital into the deal after already infusing an extra $100,000 toward renovations (50% more than expected) due to deferred maintenance and cheap fixes.

They achieved a 58.16% average annualized return, an equity multiple of 1.99X, and XIRR of 83.97% in just 18 months.

If you have a deal you'd like to feature here, respond directly to this email with “deal breakdown.”

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