A pledge by the federal Liberal government to legalize marijuana could throw a lifeline to owners of small, older industrial buildings in Metro Vancouver if the experience of pot-legal Denver is any indication.
Vancouver is seen as at the forefront of Canada’s marijuana industry, with newly legislated retailers and a large underground of illegal growers and storefronts across the region.
Metro Vancouver’s industrial market, meanwhile, is strong but dominated by large new warehouse and logistics space, notes Colliers International. The overall vacancy rate is a tight 2.4 per cent, but landlords with outdated and smaller space suffer much higher vacancies.
“Older buildings make up a large portion of current listings and [such] landlords have been forced to lower lease rates and increase incentives to attract tenants,” according to Collier’s most recent survey of the Metro Vancouver industrial market.
Marijuana could spark that bummer into a bonus.
In the first nine months that recreational marijuana production was made legal growers leased up three million square feet of “functionally obsolete industrial space” in the Colorado capital, according to Amy Erixon, a principal and managing director, investments with Avison Young in Toronto.
In all, it is estimated that pot growers and distributors took up a third of all the warehouse space leased in Denver since marijuana was legalized in 2013.
Paul Kluck of CBRE in Denver, estimated the 1,700 growers tend to seek low-profile space that is relatively small and has ample power and water capacity, along with good ventilation.
Erixon said Denver marijuana growers are paying up to US$20 per square foot triple net, often in cash, for lower-class industrial space, compared to an average of US$3.50 per square foot that other users are paying for the same space.
The reason for the high prices is due to the difficulty of financing because marijuana is illegal federally. U.S. federal banking laws prevent banks from lending or accepting deposits from illegal businesses. Also, most commercial mortgages prevent tenants from operating illegal businesses on the property. As a result, marijuana growers have been limited to the small minority of industrial properties that carry no commercial bank loan.
Also, because U.S. federal law outlaws the use of credit cards for marijuana sales, all sales are cash transactions. As a result, grow warehouses must convert cash into money orders to pay for leases.
If the Liberal government legalizes marijuana in Canada, growers could access conventional financing, however, which would broaden the real estate reach, Erixon noted.
But Terry Thies, an industrial specialist with Avison Young in Vancouver said owners of obsolete industrial property are unlikely to wait for marijuana legalization. “They are more likely to tear the old building down and redevelop it is as strata industrial,” he said.
Legalization however, could take recreational marijuana production from the backstreet to the mainstream real estate market.
“There remain a number of home growers who continue to produce large quantities of marijuana, beyond what a reasonable person would view as personal consumption. There are also a large number of sellers who are not able to obtain marijuana through legal means to supply their store fronts,” said Randy Fincham, a media spokesman for the Vancouver Police Department.
The VPD estimates there are more than 100 retail shops illegally selling marijuana in the city, but the City of Vancouver plans to trim that to less than a dozen legal outlets by April of 2016, following its new licensing regime.
