“Growing Op” Fast: Cannabis Legalization Disrupting Industrial & Retail Sector
The legalization of recreational cannabis has already started to stimulate the economy through job creation and will also benefit from the likely increase in tourism. According to Statistics Canada, nearly five million Canadians spent about $5.7 billion in non-medical marijuana sales last year.
Demand for retail and industrial space among cannabis suppliers (growers, warehouses and distributors) has firms actively scouting for prime locations, ramping up production capacity and securing leases ahead of schedule. Depending on the province that you are in, however, it is easier said than done. Each retail store needs to be licensed by the respective Provincial and Local Governments. Existing cannabis stores will also have to apply for a license or they will not be allowed to operate.
What is certain is that rents and costs will increase for both retail and industrial spaces. Landlords are also grappling with the increase in costs as a result of providing services and amenities to new cannabis retail businesses. In some areas in Alberta, landlords are boosting premium rents to almost double the rent for cannabis retail stores. Indoor cultivation incurs higher costs for electrical, plumbing, drainage, HVAC and security upgrades, and will play a larger role in rate increases in an already tight industrial market.
The retail sector will experience the largest impact, but also face the most uncertainty. Ontario and Alberta’s retail model both consist of private retailers. However, Ontario will take on a more government-provisioned approach and will control distribution as well as online sales. Calgary and British Columbia have restricted the proximity of cannabis stores to schools, community centres and residential neighbourhoods to 300 metres. Ontario will allow local municipalities to decide if they want to opt out of allowing retail cannabis locations to operate within their boundaries.
Canadian Imperial Bank of Commerce (CIBC) estimates retail sales revenue for adult-use cannabis will grow rapidly and approach $6.5 billion by 2020. Health Canada has already issued 113 licenses for cultivation operations across the country but face a backlog of 500+ applicants and counting. Depending on government policy, tax implications, pricing, and product accessibility and availability, legalization has the potential to foster economic growth by creating new opportunities for commercial real estate, boost employment and eventually disrupt the black market by shifting revenue streams.
However, based on “true” demand, many suspect an impending shortage upon legalization due to inadequate production capacity. For cannabis production and growth facilities, in addition to adhering to government regulation, the challenge is finding suitable space with the potential for expansion. Canada’s vacancy rate for industrial properties is around 2.6%, the lowest in more than five years. The competition among e-commerce tenants and the cannabis sector will remain fierce as both look to take additional industrial space. Moreover, higher occupancy costs associated with operating a cannabis facility, especially in markets like Toronto and Vancouver, are forcing companies to outer regions like Leduc, Alberta (the home of Aurora Sky’s 800K SF production facility) and Smith Falls in Ontario (Canopy Growth Corporation), thus providing the opportunity for future growth to these areas while being able to operate more cost-efficiently.
In 2017, publicly-traded cannabis companies occupied nearly 1.5 million SF of space. A year later, the existing operational facilities is over 8.7 million SF, more than 5 times the space comparing year-over-year. It is projected that an additional 6.4 million+ SF of projects have commenced construction and/or are currently planned. The facilities will not be fully operational until the end of 2018 to 2020 or beyond. On top of this, these totals do not include privately-funded operations or businesses. The potential shortfall of industrial space may be one of the greater challenges of this burgeoning industry.
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