A federal Liberal government pledge to legalize marijuana could throw a lifeline to owners of small, older industrial buildings in Metro Vancouver if the experience in Denver, where the drug is already legal, is any indication.
With newly legislated retailers and a large underground of illegal growers and storefronts across the region, Vancouver is seen as being at the forefront of Canada’s marijuana industry.
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 The overall vacancy rate is a tight 2.4%, but landlords with outdated and smaller space have much higher vacancies.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 Metro Vancouver industrial market survey.
Marijuana could turn that bummer into a bonus.
In the first nine months that Colorado legalized recreational marijuana production, growers leased three million square feet of “functionally obsolete industrial space” in the state’s capital, according to Amy Erixon, a principal and managing director, investments, with Avison Young in Toronto. In all, growers and distributors have taken an estimated third of all the warehouse space leased in Denver since marijuana was legalized in 2013.
According to Paul Kluck of CBRE in Denver, the estimated 1,700 growers prefer low-profile well-ventilated space that’s relatively small and has ample power and water capacity.
Erixon said Denver marijuana growers are paying up to US$20 per square foot, often in cash, for lower-class industrial space, compared with an average of US$3.50 per square foot that other users are paying for the same space.
The high prices result from financing difficulties because marijuana is illegal federally. Federal U.S. laws also prevent banks from lending or accepting deposits from illegal businesses.
Most commercial mortgages also prohibit tenants from operating illegal businesses on the property. Marijuana growers have consequently been limited to the few industrial properties that carry no commercial bank loan.
Also, because U.S. federal law prohibits 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.
However, Erixon noted that if the new Liberal government legalizes marijuana in Canada, growers could tap conventional financing, which would broaden their real estate options.
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,” said Vancouver Police Department (VPD) spokesman Randy Fincham. “There are also a large number of sellers who are not able to obtain marijuana through legal means to supply their storefronts.”
The VPD estimates that there are more than 100 retail shops illegally selling marijuana in the city, but the City of Vancouver plans to trim that to fewer than a dozen. •
