Marijuana Buzz Looks Like a Boon for Real Estate — But Not Without Risks

Written by: Murtaza Haider and Stephen Moranis – Financial Post

Haider-Moranis Bulletin: The tremendous hype and uncertainty about how big the market will be pose real risks for investors in the real estate space.

They are calling it the green rush. Some are invoking comparisons with the Wild West. The legalization of recreational marijuana has generated tremendous interest and investment from all quarters, and the world of real estate has been no exception.

Millions of square feet of commercial real estate are suddenly in play. The marijuana industry in Canada requires warehouse, greenhouse and retail space to meet the demand of a growing market. While the growth presents exciting opportunities, the tremendous hype and uncertainty about how big the market will be pose real risks for investors in the real estate space.

Nevertheless, many in the commercial real estate industry believe that marijuana legalization couldn’t have come at a better time, when industrial and retail rents were already showing signs of weakness owing to shrinking demand. This problem has been more acute for the retail sector, which has seen online sales compete aggressively with traditional brick-and-mortar outlets.

The experience in Colorado, the first U.S. state that legalized the recreational use of marijuana, is indicative of strong growth in demand for warehouse space for marijuana grow-ops and retail stores for distribution and sales.

 

But how large is the demand for commercial real estate tied to marijuana production? According to the Altus Group, a large Canadian real estate consulting firm, marijuana-growing facilities have already consumed 8.7 million square feet in the first nine months of 2018. Another six-plus-million square feet are in the pipeline.

The demand for real estate has been more pronounced in B.C. and Ontario as marijuana grow-ops gobble up warehouse, greenhouse and retail space. Kelowna alone has identified several hundred zoned sites for marijuana-oriented commerce. Logistics and distribution sites will generate even more demand for space.

Looking ahead, Alberta will likely see significant demand for marijuana-related real estate. Unlike other provinces that have restricted distribution through provincial liquor control boards, authorities in Alberta have licensed private operators for marijuana sales, opening up the possibility of innovative retail offerings. The Second Cup, for example, has already announced plans to convert some of its struggling coffee-shop locations to marijuana dispensaries.

Retailers and mall operators are also pursuing marijuana businesses. Canada’s largest privately owned liquor retailer, Alcanna Inc., has secured dozens of locations in Alberta to operate marijuana dispensaries. In August, RioCan REIT reportedly signed 18 cannabis-dispensary leases in Alberta, B.C. and Ontario.

High-end cannabis stores will soon be visible in malls across Canada where cannistas, like baristas before them, will help shoppers find products that suit their tastes.

Marijuana-growing facilities have already consumed 8.7 million sq. ft. in the first nine months of 2018. Another six-plus-million sq. ft. are in the pipeline

In 2017, Health Canada revealed that 210,000 Canadians were licensed to use medical marijuana. Almost 11,000 individuals could grow marijuana for personal use while the rest had to buy it from government-approved growers. With marijuana becoming available for recreational use, the number of users is likely to grow dramatically.

Statistics Canada estimated that Canadians spent almost $6 billion on marijuana in 2017. Most of the estimated five million users bought marijuana illegally for non-medical purposes. At the same time, the legal sale of alcohol reached $22 billion.

The expected size of the retail marijuana market in Canada is not known for sure. It is not apparent how much of the illegal demand will convert to legal channels through licensed dispensaries.

Early reports from Alberta revealed that the sales from licensed stores in the first five days of legalized operations were in the millions of dollars. Nova Cannabis, owned by Alcanna Inc., reported that its five stores in Alberta registered $1.3 million in sales in the first five days alone.

While the novelty of buying legal cannabis was certainly a factor, the demand bodes well for cannabis retailers, and for the owners and operators of commercial real estate in Canada.