Cannabis: What to do about the new kid on the block?

Exploring the opportunities and challenges of cannabis legalization for real estate

There has been a lot of talk about the many business opportunities resulting from the legalization of recreational cannabis, but little has explored the impact on the real estate market. According to Emerging Trends in Real Estate 2019, cannabis legalization will boost real estate opportunities as new businesses look for industrial space for agriculture, research and development (R&D), greenhouses, manufacturing, warehousing and retail space to sell products. This year’s report also raises questions for landlords around the duty of care to tenants, changes to residential and retail lease agreements and additional costs associated with licensing and insurance for cannabis operations.

Here are some of the scenarios and our predictions for industrial, retail and multi-use and multi-residential properties.

Property type outlook

Licensed producers’ need for new manufacturing, packaging and transportation and logistics facilities, especially warehousing, will drive demand for industrial space. The Greater Toronto Area as well as British Columbia and Alberta, are likely to be the hottest markets for new cannabis industrial space given demand for product domestically and globally in the first half of 2019. In addition, as licensed producers (LPs) and liquor boards look to reduce their delivery times, hub and spoke models with spokes in city centres will also add to demand in these locations.

But commercial developers may find it challenging to get the financing necessary for cannabis-oriented projects, as some lenders may shy away from businesses perceived to be controversial. Landlords will also need to address the challenges of securing properties with cannabis tenants and mitigate the risk of damage to buildings’ physical structures due to the unique impacts, like high humidity, of cannabis production. Property owners will also want to make sure their involvement in the cannabis sector doesn’t interfere with their ability to do business in the US.

Canada is unlikely to remain competitive for indoor cultivation once warmer climates that are lower-cost become active. To keep its competitive edge, Canada should be looking to R&D opportunities around intellectual property (IP) like brands, innovative delivery technologies and precision dosing mechanisms. All of these emerging industries require space.

As the industry continues to evolve from cultivation towards manufacturing and R&D, the demand for industrial space in the cannabis industry will change as well. The large indoor cultivation operations that currently dominate the industry are at risk of being replaced by production in low-cost regions. Property owners seeking to attract cannabis tenants should prepare for the industry’s future business requirements, which is trending to be largely centered around IP generation, enhancement and global-scale manufacturing and less around cultivation and warehousing to make themselves attractive partners for industry operators

For retail property owners, Canada’s cannabis industry offers an opportunity to rent to a new, ready-made tenant base eager for retailing space to sell everything from the currently allowed dried flower, oils and paraphernalia to, eventually, vapes, beverages and edibles.

Challenges include:

• low vacancy rates in prime high-street retail locations

• municipalities in Ontario introducing strict zoning requirements making it difficult to find space in approved locations (e.g., barring tenants from certain areas like shopping malls and schools because of concerns about appealing to minors and attracting the wrong clientele)

For landlords, insurance and security costs will rise with the presence of cannabis tenants and increased risk of fire, water damage, theft or vandalism. They’ll need to make sure they review tenants’ lease agreements and terms and conditions to check that anyone selling cannabis products is licensed to do so.

Mixed-use properties combining retail and residential spaces may be attractive to cannabis retailers given the potential market directly above their stores. There could be future opportunities for cannabis players to approach property owners to provide people with a location to socially consume cannabis products (depending on whether the property’s smoking or vaping rules prohibit it or not). Developers may approach future projects with cannabis in mind, with spaces designed for cannabis consumption and gardens where tenants can grow the plant.

There are many Canadians who don’t live in single-family homes and may not have a legal place to consume cannabis products in their residential properties such as condominiums or apartment rentals. This leaves landlords with the need to consider their “duty to accommodate” and what it means for lease agreements, cleanup clauses for rentals and security deposits. Landlords and property owners are also dealing with uncertainty around how cannabis affects building health and safety and fire protection programs.

Key takeaways

Know the rules

Understand provincial and municipal cannabis regulations so you can make the right decisions for your business, properties and tenants.

Plan for growth

Look to the future: develop a plan for legalization 2.0 to take advantage of next-gen cannabis opportunities. As production moves overseas, plan for large, vacant facilities sitting unused in a few years’ time.

Develop a cannabis strategy

Establish a plan that meets the needs of Canada’s growing cannabis industry and those searching for real estate. Supply problems could also contribute to this as well.

Be agile

As this industry evolves, it’s important for real estate players to be nimble, agile and flexible so they can easily adapt and not risk losing out on an opportunity, or worse, going out of business.

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