Innovative Industrial Properties (IIPR 0.85%) is one of the hottest cannabis stocks in the market today. The real estate investment trust (REIT), which leases industrial space to experienced medical marijuana operators, has achieved a staggering 68% return on an annualized basis over the past five years. 2021 was a strong year for the company, adding 43 properties to its portfolio, which gave the company a healthy boost in its already strong revenue growth. But will cannabis real estate be as hot in 2022? Here's what the data is telling us.
2021 saw record cannabis sales
Cannabis demand didn't falter during the pandemic; it actually increased -- a lot. Marijuana sales jumped to a record $30 billion in 2021, $11 billion more than 2020. This could be from the increase in states offering recreational or medical use of marijuana, but another likely cause is the pandemic. Historically, alcohol and drug consumption increases during challenging economic or social circumstances. Considering new strains of the coronavirus continue to appear, it's likely this use will continue if not increase substantially in 2022. Some estimates believe sales will increase to around $37 billion in 2022, having the potential to reach over $100 billion by 2026, a staggering number in such a short period of time.
Legalization opportunities and challenges
IIPR operates in 19 states currently, but with primaries coming in 2022, Mississippi, Kansas, South Carolina, and North Carolina could be next in line for legalizing medical marijuana, meaning there are new states from the company to branch into. New York, one of the states IIPR most recently expanded into, is predicted to be one of the top markets for marijuana use by adults, with sales up 37% year over year in 2021.
There's now another REIT specializing in medical marijuana, NewLake Capital Partners Inc, which has a market cap of $583 million and 28 properties under management, meaning it's still a small company. For comparison, IIPR's market cap is $5.1 billion, with 103 properties under management.
But even if new states don't hop on the medical marijuana bandwagon, cannabis real estate has plenty of room to grow. Since marijuana isn't approved on a federal level, banks are unable to participate in lending for the purchase or improvement of real estate or any other type of business loan. That means the current cannabis market is reliant on REITs like IIPR and NLCP and the private market.
For a number of reasons, it seems the cannabis real estate market is shaping up to have another hot year in 2022. With primaries underway and continued turmoil around the coronavirus pandemic, there's plenty of room for both of these REITs to grow.