The legalization of recreational cannabis in Canada, that comes into effect in October, has landlords across the country trying to determine if retailers in this emerging industry will be a good fit for their properties.
A new report by Avison Young, Canadian Cannabis Legislation and the Commercial Real Estate Industry: How Can Landlords Qualify Prospective Retail Tenants?, said most landlords have already made decisions about retail cannabis tenants with limited and imperfect information and the market will rebalance as the industry matures.
James Heaps, a vice-president based in Avison Young’s Calgary office, who specializes in acquisitions, divestitures and business advisory services, said the commercial real estate company has developed a request-for-qualifications framework for landlords.
“We developed a RFQ process to educate, vet and assist landlords in selecting prospective retail-cannabis tenants,” said Heaps. “As a result, landlords, and their existing tenants, are realizing the potential benefits of working with credible retail-cannabis operators and the overall potential of the recreational-cannabis industry.”
“Now that the federal government has approved the legal sale of recreational cannabis, and the competition for retail-cannabis tenants is likely to ramp up as a result, the RFQ has taken on greater importance.”
Heaps said landlords have to consider three key areas about tenants as they make decisions on who they will lease property to in the future – the leadership, the human resources and operations, and the financing.
“The leadership of the cannabis retail organizations. What they’re operational plan is. Such things as their standard operating procedures. Security protocol. Training of staff. The Alberta government does have the SellSafe program which is a four-to-six hour program for helping train staff and getting them up to speed with the proper protocol as well,” said Heaps.
“And the last piece is really the financial aspect which is recognizing all of these retail cannabis stores are startups when they open. And like any startup there’s significant capital costs up front. Part of the success will be ensuring that they’re financed properly up front.”
Calgary’s retail vacancy rate has remained in the low single-digits for many years in recent times and sometimes it’s been hard for new retailers to enter the market as they’ve had difficulty finding space.
Susan Thompson, Research Manager for Avison Young’s Calgary office, said the legalization of recreational cannabis will enhance retail real estate sales and leasing activity in Canada.
“There’s been obviously a very quick scramble to secure space because that was part of the licensing process as they had to have a firm commitment on space. So these guys need to line something up right away. And Calgary already had a fairly tight retail vacancy outside of the central business district,” she said. “So they were trying to compete for a limited number of spaces.”
She said e-commerce and in-store shopping will be closely watched as the market seeks to determine consumers’ preference levels – and cater to them.
“As a result, many new and exciting retail-cannabis-related real estate opportunities are about to unfold – and investors and landlords need to do their homework on prospective tenants,” she said.
Heaps said a considerable amount of leasing activity has already taken place in this market and leading retailers will emerge.
“Once legal retail-cannabis sales commence in October, industry leaders will likely expand by merging with and acquiring other companies,” he said. “This activity will spark demand for additional retail space, providing landlords with a second opportunity to attract and assess prospective tenants.”
Heaps said the typical size of a retail cannabis store will be between 1,500 square feet to 3,000 square feet with some even larger.
But that size of space is not always available in the market.
“They’re looking for the right demographic mix in the neighbourhood around them,” said Thompson. “They’re looking for high profile locations with lots of vehicle, pedestrian and transit around it. And then there’s certain areas that obviously are destinations. So they’re looking at those as well.”