Now Legal, Cannabis Drives Up Canadian Retail Rents

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by Garry Marr, Toronto Market Reporter  CoStar Group 

 

Tenants Offer Cash, Stock Options Amid Expected Domestic and US Tourist Demand

Ed Sonshine of RioCan said marijuana users may fit into the profile of tenants at The Well, the massive mixed-use development RioCan and Allied REIT are developing in downtown Toronto.

Even before online cannabis sales began across Canada on Wednesday, real estate firm RE/MAX said demand from the marijuana industry had already started turning places like Edmonton, Alberta, and Kelowna, British Columbia, into commercial real estate “hot spots” expected to drive sales into 2019.

In the country’s most populous city, Toronto, landlords report getting offers from tenants with perks that include everything from 12 months of rent in cash up front to stock options in underlying marijuana companies. And all of these proposed tenancies include rents well above the market, even as much as a 30 percent premium, in anticipation of sales demand from across Canada and from what some analysts say will be U.S. residents embarking on marijuana tourism. 

Jordan Pearl, managing director of the Pearl Group in Toronto, said the mania to sign a lease has been driven by federal regulations that require a physical address to obtain a cannabis license. Retail shop openings vary by province, with Alberta having stores open Wednesday, while Ontario probably won’t have them until April.

“People are trying to secure as many locations as they can,” said Pearl. “They are just way overpaying for space right now.”

In Ontario, the Conservative government in Canada’s largest province opened the door to privately run retail cannabis enterprises by scrapping a Liberal party plan for government-managed outlets. 

Pearl said his own experience in renting out a property on Toronto’s fashionable Queen Street West led to getting an offer for 30 percent more than market value.

It’s not just small landlords interested in cashing in on cannabis. Toronto-based RioCan, the second-largest publicly traded real estate investment trust in the country, has been actively looking at cannabis tenants. Chief Executive Ed Sonshine mused during a third-quarter conference call that marijuana users probably fit into the profile of tenants of The Well, its 7.8-acre office, retail and multifamily development with Allied REIT in downtown Toronto.

“At the risk of making a joke, we are going to have 6,000 tech/knowledge workers at The Well. You think that’s a good cannabis location? Probably. We expect premium rents. It’s not a big amount of space, but it could be a good contributor,” the chief executive said.

Pearl said some landlords are trying to do portfolio deals with cannabis retailers. “They’ll give you some good space, but then you have to take the bad space in the middle of nowhere,” he said. “It’s become a big arms race with brokers running around trying to sign up cannabis retailers. The top brokers are trying to be a little pickier about who they work with.”

Brandon Gorman, a vice president at Cushman & Wakefield in Toronto, said his firm has seen about 35 different offers from cannabis retailers over a span of three weeks.

“Cannabis is really more of a destination so [the retailers] don’t need to be at Main and Main,” said Gorman. “Some companies are offering warrants that are like stock options and percentage rents” giving the landlord a percentage of sales.

In his 11 years of retail, Gorman said he’s never seen companies offer stock options to secure leases. It is the type of practice that was common during the dot-com boom in the late 1990s. “I mean this is crazy,” he said. “It’s just totally changing the market right now.”

That demand for space is feeding into a solid Canadian retail sector. CoStar data show the vacancy rate in the Greater Toronto Area for the retail sector was 2.9 percent at the end of August, down 0.2 percentage points from a year ago. Out west, Calgary’s vacancy rate was 2.6 percent during that time.

Securing the space is only one problem for would-be cannabis retailers. There now are increasing predictions that the product will be sold out on Wednesday.

Speaking at the International Council of Shopping Centers conference in Toronto this month, Nick Pateras, vice president of growth and international strategy with Lift & Co., a Toronto-based cannabis media and technology firm, predicted there just won’t be enough of the product to go around.

“There will be a shortage of cannabis on day one,” said Pateras, adding there is only about half of the cannabis in production the market needs.

He said the black market will thrive because of the shortage and pointed to Colorado, where 25 percent of the market goes through unregulated channels. Economists have pointed to spending data for U.S. tourists in Canada to project that Americans will visit with plans to buy and use cannabis during their visit.

On the residential landlord front, the issue for multifamily owners is what do they do about cannabis users on their property and the conflict it might create between tenants.

“We are trying to keep up with ever-changing rules,” said Sam Kolias, chief executive of Calgary-based Boardwalk REIT, one of Canada’s largest landlords, which sent a notice to tenants telling them plants could be grown on the premises but marijuana could not be smoked. “The health and safety of every one of our residents is our first and foremost focus.” 

The chief executive said Boardwalk is willing to consider individual circumstance with “unique” situations to reverse its position on smoking in apartments.

Tony Irwin, chief executive of the Federation of Rental-Housing Providers of Ontario, which lobbies for landlords, said the issue of cannabis consumption in multifamily units is something all multifamily owners are trying to come to grips with today.

“It is absolutely a concern,” said Irwin, adding members worry about plants being grown in units. “I’ve seen pictures of units destroyed from water damage, and that’s not even mentioning the odor from growing that many plants and electricity-use issues if you don’t have submetering.”

Cannabis, he said, “is something on our radar.”