Cannabis Legalization – Six Months In
- Impact on tertiary markets – rising land values and housing prices; booming local businesses due to tourism and new residents employed by cannabis companies moving in
- Urban areas: Perhaps smaller production in urban areas, similar to e-commerce logistics
- However, as we move towards urban areas, more restrictive policies; differing bylaws-> X meters proximity to a school
- According to Statistics Canada, Canadian consumers spent approximately $1.5 billion on cannabis in 2018, and only 21% was legal. This was mainly the result of product scarcity, licensing backlogs, pending regulations, and pricing differences between legal and illegal cannabis
- Demand is only expected to grow with the pending legalization for cannabis edibles, beverages, topicals, and extracts by October 2019
- Impact to owners on allowing cannabis users on their property or in designated areas – impact on building value and quality
- What is the impact on potential tenants? Will designated areas become an attractive amenity or deterrent?
- Tenant perspective – are they looking for a space that allows for cannabis use on their property; internal employment agreements
- What type of building owners or employers are allowing its use or excluding it?
- Retail stores have already opened in BC, Alberta and Quebec, but with only two open in Toronto and others still pending in Ontario, what are the lessons learned?
- Health Canada: federal government sanctions to suppliers led to product shortages
It’s been less than 6 months since the legalization of recreational cannabis and the sector continues full steam ahead, breathing life into once struggling tertiary communities by providing new job opportunities for the local population. In Leamington, Ontario, Aphria Inc moved into the region upon the closure of the Heinz ketchup processing plant and in Smith Falls, Ontario, Canopy Growth Corp took over the former Hershey’s plant. After years of economic dependency, both communities suffered higher than normal unemployment rates. Now, cannabis companies have sparked economic growth in these regions due to the rise in cannabis tourism and workers relocating to these communities. Other markets such as Kelowna, British Columbia are also expanding their cannabis footprint. The Kelowna council recently approved the expansion of Flowr Corporation’s campus on the Okanagan Rail Trail across from the Agricultural Land Reserve (ALR) and approved a recommendation to rezone the land from heavy industrial to general industrial in order to facilitate the construction of new industrial buildings. The proposal will move to public hearing in April 2019.
At the same time, the increase in employment activity and the success of cannabis companies are pushing agricultural land and house prices higher in tertiary markets. For example, in Leamington, the average price per acre for unimproved farmland between 25-200 acres was at $8,000 in 2013 and rose to $30,000 in 2018. The average price per acre for improved greenhouse operations also jumped from $150,000 in 2013 to $250,000 in 2018. The real estate market in both communities is growing, but this is not happening in all tertiary markets, only the ones like Leamington and Smith Falls, where you have access to labour and low land prices.
Current agricultural land prices within Vancouver and Toronto are too expensive and these areas may not have the labour force to support this sector. A few cannabis companies have opened larger grow operations within a short distance of major markets, but there are limited sites that can offer the amount of land needed to support this type of operation. According to the 2017 FCC Farmland Values report, land values in Southwestern Ontario range from $10,200 per acre to $22,700 per acre and in Eastern Ontario land values range from $2,300 to $14,500 per acre. In contrast, within the Greater Toronto Area, average agricultural land is $103,000 per acre and in Vancouver the price is triple at $401,653 an acre.
According to Statistics Canada, Canadian consumers spent approximately $1.5 billion on cannabis in 2018, and only 21% was legal. This was mainly the result of product scarcity, licensing backlogs, pending regulations, and pricing differences between legal and illegal cannabis. Demand is only expected to grow with the pending legalization for cannabis edibles, beverages, topicals, and extracts by October 2019. In order to serve this pent-up demand, supply will need to be in check and producers will need to ramp up production and expand their capacity once the federal government sanctions more suppliers.
Similar to e-commerce logistics, smaller production near urban locations may be a more efficient solution to get product out to customers quickly. However, in addition to high land values, by-laws for production, retail and usage in urban areas become more restrictive the closer you get towards the centre of these markets. In Ontario for example, each municipality can have their own set of rules such as a maximum amount of distance between a cannabis retailer and a school. While the first legal cannabis store opened in Toronto on April 1, many legal cannabis stores are still pending authorization in Ontario and are expected to open in April 2019.
Policy considerations of cannabis retail locations can also translate to building owners and how they will determine regular usage on their properties. What will the impact be on the property value and quality of the building itself granted that owners allow cannabis usage on a building’s premise? Should building owners use designated areas offering as an amenity-type to attract potential tenants, or will it be a deterrent?
There are still many unknowns as the cannabis sector continues to grow and evolve. The various levels of government continue to fine tune their policies and regulations, to ensure that public safety is maintained while at the same time the sector can still meet demands in both recreational and medicinal needs of the consumer.