Are AI data centers coming for cannabis cultivation real estate?

Key points:

• Struggling cannabis grow facilities are drawing interest from data center developers amid the nationwide AI boom.
• Cannabis grows and data centers have similar infrastructure needs, such as high-capacity power, industrial HVAC and cooling.
• Oversupply, collapsed wholesale prices and hemp competition have pushed cultivators to downsize or seek exits.
• Texas, Virginia and Michigan lead as conversion hotspots, while high-cost Northeast markets rarely pencil out.

Amid the nationwide AI boom, struggling cannabis cultivation facilities in certain mature and emerging state markets are drawing attention from real estate developers eager to build data centers.

And a growing number of cannabis operators are exploring whether underutilized licensed grows could find new life – and generate new revenue – as data centers, real estate brokers and observers told MJBizDaily.

The idea that cannabis grows – a sign of the industry’s recently bygone bull market – could give way for AI data centers isn’t far-fetched, according to commercial real estate professionals. Indoor cannabis cultivation facilities were built for continuous, power-intensive operations. And data centers are one of only a few reuses that fit that description.

“You have an asset built out for a specific use,” said Ryan George, founder of Sacramento, California-based THC industry real estate marketplace 420 Property.

“Adaptive reuse of that asset makes a lot of sense.”

But data centers require a much larger footprint than grow operations require and are much hungrier for power. These obstacles, plus the time it can take to retrofit a cultivation facility, mean data centers aren’t coming for the cannabis industry quite yet.

Why do data centers want cannabis cultivation buildings?

In addition to friendly zoning, marijuana grow facilities are appealing to data center developers because of their infrastructure.

Grows come equipped with many of the features data centers require, including:

• High-capacity electrical service
• Industrial HVAC systems
• Climate controls
• Layered security

“It’s not an exact one-to-one fit,” George warned.

“Data centers have an additional layer of security, like Kevlar bulletproof wall paneling,” he added. “But most cultivation spaces, if they’re done right, have the insulation, cooling and power. It’s not too heavy a lift to install (the paneling).”

Distressed pricing is a key driver, he said. Data centers are expensive to build, and developers are hunting for cost savings by acquiring troubled assets.

George pointed to a large Washington state cultivation center that started planning in 2019. It took longer than expected to build out – so long that the economics of growing cannabis no longer worked.

However, the cooling, insulation and power made it attractive for a data center. Several potential data center clients looked at the space, but a deal to sell the property for another purpose is in progress, he said.

While George has seen fewer than two dozen data center clients tour cultivation operations – and without buying – interest is growing, he said.

What’s stopping AI data centers from taking over cannabis cultivation?

Size is the biggest mismatch when converting cannabis grows into data centers. Most cultivation facilities top out around 30,000 square feet, George said. Data center developers typically look for much larger footprints.

“It’s not the tenant improvements,” George said. “It’s the size.”

Power scale is another gap, said Niki Krear, vice president of acquisitions for Connecticut-based real estate investment trust New Lake Capital Partners.

The average data center needs well over 10 megawatts of power, while most cultivation facilities carry 3 to 5 megawatts, built primarily for lighting and climate control.

Between rezoning when necessary and upgrading power and fiber connectivity, converting a cultivation facility to a data center can take up to five years, she added.

“Cannabis facilities are still high power relative to a warehouse user,” Krear said. “There is a conversion play, but it takes time.”

New Lake had three cultivation facilities available for lease as of June 30, according to company filings. It continues to market them to prospective cannabis tenants.

Where does conversion work, and where doesn’t it?

Geography is the deciding factor for whether to convert a cultivation facility into a data center.

Krear ranks Texas first and Virginia second for data center conversions, followed by Georgia, parts of the Midwest, the Rocky Mountain region and Nevada.

“It’s a combination of finding affordable power, dense fiber networks and favorable tax policies,” Krear said.

Michigan stands out as a strong candidate.

“Power is cheaper than in California and Massachusetts, and there are so many cultivation facilities that are vacant or distressed,” Krear said.

Why is the cannabis industry shedding grow facilities?

Several high-profile cannabis acquisitions have left out cultivation, as operators seek to expand their retail footprints while consolidating production.

Denver attorney Tom Downey of law firm Ireland Stapleton points to three overlapping problems behind this trend:

• Supply expanded sharply after operators built large cultivation facilities, while demand grew more slowly.
• Wholesale prices have dropped compared with five years ago.
• Unregulated hemp-derived THC products pulled consumers away from licensed cannabis.

“Those three together mean marijuana businesses are in trouble,” Downey said. 

The impact is visible. In Colorado, Green Dragon and PharmaCann have announced closures of large cultivation facilities in the Denver area following acquisition. It’s not known what plans are for the facilities.

Elsewhere, cannabis cultivation operators have scaled back, using half the space they once ran at full capacity.

“Some facilities are only using half their space, and some are going under completely,” said Downey, noting that not every cultivation site is automatically ready to become a data center.

“Some of them are close to turnkey,” he added. “But it is not that they can just plug things in and everything works.”

Can cannabis and AI data centers coexist?

Instead, Downey sees a more creative option gaining traction: Cannabis grows and data centers sharing the same building.

“Some data centers can be so compartmentalized that they don’t have to be massive – they can be micro, they can be in shipping containers,” he said.

“Instead of massive, stadium-size data centers that suck up energy and water, you can have micro-sized ones that you can plug into a marijuana grow facility.”

Downey recently handled a transaction in which a landlord renegotiated a lease with a cannabis tenant that had scaled back operations, then brought in a data center operator using shipping containers to occupy the unused space.

Downey also sees opportunities in new markets.

Real estate investors or property owners in states just launching cannabis programs might consider building flex facilities designed to run part cultivation, part data center – positioning themselves for whatever the market demands.

Are cannabis cultivators trying to repurpose their grow?

In Kalamazoo, Michigan, licensed cultivator Harbor Farmz is marketing its 32,850-square-foot cultivation and processing facility for data center development.

The company built the facility in 2020. But with wholesale prices depressed, the building no longer makes sense as a grow, founder and CEO Michael Ward told The Kalamazoo Gazette.

“It makes it very difficult to succeed with that facility built the way it is when (marijuana) pricing is at the bottom of the barrel where it is right now,” Ward told MLive. “And there’s no end in sight.”

The property has 1 megawatt of power on site, with capacity to expand to 1.5 megawatts in the near term and up to 15 megawatts long term. It’s also already zoned for data center use.

Ward said Harbor Farmz will continue operating from a new location if the building sells.

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.