Canada: Marijuana Legalization Creates Budding Demand For Retail Space

Photo Credit: Jason Franson

Alberta is shaping up to be an exciting power play for cannabis retailers when the psychoactive herb becomes legal this year.

But to hear Ben Volorney describe the approaching boom in marijuana shops, you might think it was the second coming of Ralph Klein. “If you want to talk about the Wild, Wild West of cannabis, it’s Alberta,” says Mr. Volorney, a retail broker in the Edmonton office of Avison Young, a global player in the commercial real estate business. “It’s nuts over here, nuts.”

His office gets a dozen calls a week from business people interested in leasing anywhere from 1,200 to 3,000 square feet of retail space to set up a cannabis shop in a street-front location or suburban mall. The reason demand is sizzling is because Alberta, unlike Ontario, British Columbia or Quebec, has opted for a fully private approach to cannabis retail, with big expansion opportunities for anyone who gets in early and has money to invest over the long run.

That’s hardly surprising considering the province is also home to some 1,400 private liquor stores. In the first year alone after legalization this summer, more than 200 cannabis shops are expected to open their doors for business across the Wild Rose province.

That’s significant because it will help to lift the sagging fortunes of retail landlords who have in recent years been knocked off their feet by a growing preference for online shopping at sites such as and a chronic slump in the oil patch that has thrown thousands of Albertans out of work.

“To start, cannabis retail will occupy roughly one-sixth of the commercial real estate that liquor does,” says Mike Tomiyama, chief operating officer at Calgary-based 420 Clinic, which specializes in medicinal marijuana. He adds that the Alberta Gaming and Liquor Commission requires applicants for a cannabis license to have a signed lease or at least a letter of intent.

“Groups based in Ontario with significant assets are coming to Alberta to secure retail locations,” says Mr. Volorney. “Recreational marijuana is a major opportunity for landlords to bolster rent rolls in this province.”

Bruce Linton, founder and chief executive officer of Canada’s biggest cannabis operator, Canopy Growth Corp. of Smiths Falls, Ont., rates the impact of recreational cannabis on this country’s depressed retail sector as an 8.5 on a scale of one to 10. “Anyone with a mall who can attract a cannabis store will do a lot better because it will drive traffic,” says Mr. Linton, whose interests in the cannabis business span the entire country and touch every aspect of the supply chain from production and distribution to retail. “The value is far above most tenants in regional and suburban malls.”

Canopy Growth has signed deals with Quebec, Manitoba and most of the Maritimes to supply cannabis when it becomes legal, with deals pending in the remaining provinces including British Columbia, where it operates two cannabis greenhouses with three million square feet of production space that formerly mass-produced bell peppers for supermarkets.

Canopy has no plans to open retail outlets in Alberta, mainly because it expects slim margins as a rowdy gang of new entrants rushes in to compete with private liquor stores switching to cannabis. It is, however, partnering with Winnipeg-based Delta 9 Cannabis to roll out eight retail dispensaries in Manitoba this year, with more on the drawing board. Delta 9, which also operates an 80,000-square-foot cannabis production facility in Winnipeg, was one of four private companies granted a license by that province to sell marijuana.

Canopy is also preparing to launch four stores in Newfoundland and several in Ontario, including a flagship embassy in Toronto. In its home province, the Tweed Main Street shop, whose sleek urban design and recessed lighting will more closely resemble The Body Shop than a typical Yonge Street head shop, won’t actually sell cannabis though.

That right is reserved for the government-controlled Liquor Control Board of Ontario, but Canopy’s stores planned for Toronto, Guelph and Barrie will support the cannabis trade by helping to educate the public and elevate tastes. Patrons will be encouraged to bring their bag of weed into the store to get questions answered about strains with trippy names like Girl Scout Cookies and Blueberry Widow. Or they can ask about cooking and baking with cannabis and related oils and extracts.

“A bunch of people like to go from clicks to bricks,” explains Mr. Linton, “and we have an effective style template for presenting cannabis products to the consumer.”

That will become especially important as the sale of marijuana in Canada expands from dried flower buds to higher-margin products such as concentrates, edibles and drinks in 2019 and beyond.

Some of the country’s biggest real estate companies with blue-chip retail pedigrees, including First Capital Realty and RioCan Real Estate Investment Trust, are already lining up to do business with cannabis shops, but they’re doing it quietly and carefully. “We are open to the possibility of properly licensed, recreational cannabis tenants, once the respective provincial regulatory frameworks are in place,” says Christian Green, assistant vice-president of investor relations at Toronto-based RioCan, which operates 350 retail properties across North America.

Still, when it comes to the cannabis trade’s real estate needs in this country, the retail side of the business is the just the tip of the industry’s iceberg. The real action is on the industrial front, where marijuana operators have locked up as much as 50 million square feet of space, according to Steven Rector, a principal at real estate brokerage Cresa Toronto.

“The marijuana industry is having a super significant impact on commercial real estate,” says Mr. Rector, whose office is part of a global network headquartered in Washington.

That’s because the marijuana industry’s supply chain has been radically transformed by legalization and requires grow-ops the size of Ford Motor Co.’s car assembly plant in Oakville, Ont., and warehouses the size of Hershey’s former chocolate factory in Smiths Falls.

However, major suppliers such as Canopy Growth, Hydropothecary Corp. and Aphria Inc. are not leasing any of their industrial space – instead they’re buying real estate outright with institutional partners who have deep pockets, including pension funds and real estate investment trusts.

Last year, U.S. alcohol giant Constellation Brands acquired a 10-per-cent stake in Canopy Growth, a publicly traded company, for $245-million. Mr. Linton, who negotiated the Constellation deal, says from the point of view of a supplier, he does not have a preference between private or government-run cannabis shops.

He does, however, like Nova Scotia’s approach, which is to sell both alcohol and marijuana in the same provincially-owned location, separated by a glass wall.

“It’s a one-stop shop for the adult choice of intoxication,” says Mr. Linton of Nova Scotia’s retail model, noting synergies are created by allowing stores to use common checkout, inventory control and security systems.

Ontario’s LCBO is expected to open about 30 cannabis shops this year, increasing to 150 by 2020. Experts say the province has severely underestimated demand and is in for a rude awakening.

Already Progressive Conservative leader Doug Ford is grumbling about taking away the LCBO’s tight-fisted monopoly on cannabis and throwing the door open to private competition, much as Alberta has done.

If Mr. Ford is elected in the next provincial election in June, as early polls suggest, the Wild West of commercial leasing in cannabis could quickly cross over the Prairies and Canadian Shield to Ontario. The result could be bidding wars for commercial space among rival cannabis retailers.

For crafty suppliers like Canopy Growth, however, it won’t make one cannabis seed of difference either way.