How will Canada's budding marijuana industry impact warehouses?

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Warehouses in Canada could soon be housing more than an ever-increasing flow of packages from the online shopping boom.

Canada is on the verge of legalizing recreational marijuana, a move expected to create fresh demand for vast indoor growing spaces. A select group of Canada’s largest marijuana growers will need an additional 8 million square feet of industrial space over the next two years, according to JLL research.

Yet across the country, warehouse space is already in short supply. And with pot legalized, the market is likely to get even tighter.

“The opportunity with cannabis in unprecedented,” Gaurav Mathur, Research Manager in JLL’s Capital Markets team, says. “This will be even bigger than the end of prohibition of alcohol, because we have so many more people, acceptance and technology.”

Canada is expected to pass the new legislation this summer. If all goes according to plan, Canada will be the second country in the world, after Uruguay, to legalize marijuana.

Medical marijuana is already legal in Canada, where the cannabis sector includes 85 companies with a combined market value of about $30 billion. That boom is expected to blossom later this year, when all Canadians will be able to buy from any dedicated retail store.

Canada’s hottest property

The estimated 8 million square feet of space Canada’s largest marijuana companies will require by 2020, according to the sample size studied in JLL’s Fertile Ground for Canada’s Marijuana Industry report, is only a fraction of the total industrial real estate sector in Canada, where there was about 1.6 billion square feet of industrial space at the end of last year.

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But the amount of empty space is already at record lows. The vacancy rate in Toronto was 2.8 percent in the fourth quarter of 2017, down from 4.5 percent in the same period in 2015. In Vancouver, the vacancy rate has dropped to 2.1 percent from 4.9 percent in the first quarter of 2015.

Developers are actively building space in areas such as Toronto, but warehouse space is still “simply in short supply,” says Brett Miller, CEO of JLL Canada. The limited space has been pushing up rents, which are projected to continue to rise this year.

Marijuana producers will be counting the cost. “Less-established producers can expect to shell out significantly more per square foot than what would have been required before legalization,” Mathur says. “More cash-rich businesses will aim to buy warehouse facilities so as to best control production standards.”

While legalizing pot will impact industrial property markets across Canada, Alberta will feel the impact most acutely, based off the sample size in the report. About half of the projected demand growth is expected around the province with several high-profile projects announced there in the lead-up to legalization.

Aurora Cannabis has a new 800,000-square-foot facility underway, which is expected be completed by the summer, and Canopy Growth, Canada’s largest marijuana company, has announced plans to develop 3 million square feet of greenhouse space in British Columbia, which will more than double its current footprint.

Beyond industrial

It’s not just warehouses that will feel the impact from the growing cannabis industry. As the projected $10 billion industry grows, companies are expected to hire more people, ultimately pushing up demand for office space.

Designated cannabis shops are likely to start proliferating around the country as the law goes into effect, shaking up the retail industry.

Aurora Cannabis recently bought a 20 percent stake in Liquor Stores, an operator of more than 230 retail liquor stores in Canada. As part of the US$103.5 million deal, some of the company’s liquor stores will switch over to cannabis retail stores that offer Aurora’s recreational marijuana products.

M&A activity is likely to continue as larger cannabis companies scoop up smaller ones and make strategic partnerships, Mathur says. “The winners in this sector will be the first ones out the gate with consistent customer service and high-grade products,” he says.

Canadian provinces are still working out the kinks in their rollout plans. Because of this, the projected date the law will go into effect was delayed to August at the earliest. While it will have a clear impact on real estate, it’s too soon to tell what the overall effect will be, Mathur says.

“The cannabis story may begin with the industrial sector, but it surely won’t end with it alone,” he concludes. “Canada has a long runway of growth up ahead.”

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