Commercial real estate owners aren’t as high on cannabis legalization as they had hoped they’d be.
More than a year after cannabis was legalized in Canada, some analysts say the sometimes-overhyped economic potential of the pot industry also infected B.C.’s commercial real estate market.
As the country closed in on the legalization date last year, many in the real estate industry were excited about potential sales and investment opportunities. For realtors, cannabis legalization meant additional production facilities and retail spaces to sell or lease. However, that boom has yet to materialize.
As of late 2019, B.C. had the lowest sales of legal cannabis of any province, according to Statistics Canada, and the second-lowest cannabis store density in the country.
“There should have been no surprise that this was going to be a slow-moving beast,” said Elton Ash, regional executive vice-president for Re/Max of Western Canada. “Of course that’s easy to say now in hindsight.”
The emerging cannabis industry has not sparked the economic activity many were expecting. While some large production facilities have been built, the cannabis market has suffered falling sales, and stock prices have dropped. The industry has therefore not had the capital or demand needed to expand. This has resulted in lacklustre commercial real estate sales compared with what was anticipated.
Ash said the good news is that there wasn’t a speculative surge in construction because commercial real estate owners want predictability and stability in demand before they react.
While the cannabis industry didn’t spark an immediate commercial real estate boom, there has been some positive impact on the real estate market, Ash said.
“The cannabis sector is adding additional market for retail and industrial use,” he said. “The story on this is that cannabis provides an additional segment to a commercial market that didn’t exist and will continue to grow.”
In addition to lacklustre demand, Vancouver’s retail landlords looking to benefit from the legal cannabis industry have had trouble obtaining traditional commercial financing from banks.
According to Re/Max, cannabis retail locations still carry some stigma in mainstream commercial markets.
One region of the province that could see more commercial real estate activity from the cannabis industry is the Okanagan, which has one store operating and six awaiting approval. Okanagan College is now offering training programs in cannabis production, which could help bolster the industry and commercial real estate in the region.
As the cannabis market and industry grow, demand from ancillary businesses, such as paraphernalia shops, will add to commercial real estate needs – and while legalization may not have created the commercial real estate demand some were hoping for, Ash said a slower and steadier demand growth is likely in the future.
Stock values plunge
The plunge in share prices for cannabis-sector stocks is shaking up corporate business plans and changing the nature of the legal work commissioned by executives.
Instead of needing assistance in securing loans, getting equity financing or navigating an initial public offering, cannabis ventures are increasingly seeking help to restructure.
Many licensed producers that once scrambled to produce sufficient quantities of cannabis are sitting on a heap of excess inventory – something that is driving down prices for dried cannabis and forcing producers to mark down the value of their production on corporate balance sheets.
The funk that has set in has pushed down shares in the cannabis-sector index fund Horizons Marijuana Life Sciences Index by more than 60 per cent as of December since it hit its year high of $23.87 on March 19. During that same time period, the Toronto Stock Exchange is up about six per cent, and the S&P 500 index has risen by more than 11 per cent.
“The financing side seems to be slowing down significantly, and what we’re preparing for is a restructuring of the industry in the sense of being ready for mergers and acquisitions and consolidation – expecting some of the bigger players who have equity on their books to make moves and try to acquire some of the juniors,” said Borden Ladner Gervais LLP partner Stephen Robertson. “That and getting ready for bankruptcies, and allowing companies to restructure.”
There were hopes of taking those entities public but those are long-term plans, he added.
“A lot of our activity is related to people still trying to open retail locations,” he said.
However, the spread of bricks-and-mortar cannabis stores in provinces such as B.C., and particularly Ontario, has been notoriously slow.
