Canadian CRE Fertile Ground for Canada s Marijuana Industry Page 1
While the United States is grappling with the complexities of marijuana legislation and sales across some states, the marijuana wave is now washing over Canada. Prime Minister Justin Trudeau has already said that this summer, cannabis will become legal across the country. Several provinces have asked the federal government to delay passing the legislation in order to give them more time to prepare. Ontario is considering allowing licensed cannabis consumption lounges in the province once recreational marijuana is legalized. 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Page 2
The Opportunity The legalization of marijuana is expected to drive up the cost of commercial real estate in all major provinces across the nation. Less-established producers can expect to shell out significantly more per square foot than what would have been required before legalization. We strongly believe that the legalization of marijuana will provide solid opportunities to the wider business community, especially in the commercial real estate sector. Less established players could look to lease some of the smaller, hard-to-rent spaces in order to gain more control over remodeling and design plans. This could have a positive impact for rent growth for smaller, industrial product in certain sub-markets. More cash-rich businesses will aim to buy warehouse facilities so as to best control production standards. We analyzed the top eight companies by market capitalization, in the past six months in Canada, prior to 2018 merger announcements Canopy Growth, Aphria, Aurora Cannabis, OrganiGram, Cronos, CanniMed, MedReleaf and CannTrust to better understand their current and future requirement for space. A number of high profile projects are already underway and, according to our projections, the total footprint of marijuana growers occupying industrial real estate across Canada will exceed eight million square feet by 2019-20 all of this even before legalization has taken place. It should be noted that the figure we estimate only refers to growing space and not the total industrial space. Brett Miller CEO, JLL Canada commented While The 8M square feet of Cannabis related short term demand for industrial space across Canada is not a huge number it is being inserted into markets that are for the most part in short supply thus, creating supply imbalance and rental increases. Buildings that would have otherwise remained vacant longer, were in many cases occupied first. Looking at markets which have been in the business for a few years, such as Denver, we already have a precedent for the positive impact that legalization can have on new markets. Projected demand for Canadian marijuana-growing facilities (s.f.) 5M 3M 1M Alberta Source: JLL Research, Company reports Ontario Quebec Saskatchewan Current square footage (s.f.) New Brunswick JLL estimate by 2020 (s.f.) Page 3
In the past, PIRET s CEO has stated that he considers medical marijuana to become a burgeoning industry and that the sector would prove to be a valuable growth path for the REIT. As the sector becomes more mainstream, investors across the spectrum would look at cannabis growers as any other tenants. A recent CIBC World Markets study noted that the potential $10-billion industry that would spawn from legalization represents a gold mine for the Canadian industrial and commercial real estate sectors. Smaller and medium-sized producers, including Tilray in Nanaimo, B.C., United Greeneries in Duncan, B.C., and AbCann Medicinals in Napanee, have found enough space in rural areas and smaller centers to set up shop. In the last 18 months, Northern Green Canada has leased 60,000 s.f. in Brampton, Canopy Growth has leased ~163,000 s.f. in Edmonton and Les Placement Wainberg provided ~30,000 s.f. to a cannabis grower. Larger operators say there is, and will continue to be, a pressing need for more large-scale commercial properties in Canada capable of housing millions of dollars worth of plants. Among the top eight cannabis companies, Alberta seems to benefit the most from their expansion plans. While we haven t factored in cannabis companies into our numbers yet for this piece, overall industrial market activity has picked up. 2017 concluded with the Calgary industrial market posting positive net absorption along with a vacancy rate (6.7%) that decreased for a fourth consecutive quarter. Compared to 2016, which saw two quarters of negative net absorption and increasing vacancy rates, 2017 market activity showed greater signs of recovery. In Edmonton, net absorption has continued to be positive for the second straight quarter, and the development of a number of owner-user properties has contributed to an increase in industrial space under construction in the GEA. Overall, improvements in Alberta s energy and manufacturing sectors have led to a more optimistic outlook on the province's economy, which has been reflected in the industrial market in Calgary and Edmonton. We estimate that, in Ontario over the next 24 months, developers are aiming to get started on new business Parks in Brampton, Caledon, Milton and Vaughan that will add much needed supply to the market. Speculative construction has been on the rise in Toronto and Montreal as developers respond to tenant demand and we expect asking rents to rise further. Q4 2017 Vacancy Rate (%) Q/Q Change Average asking rent (p.s.f.) Q/Q Change GTA 2.8% $6.22 GMA 4.9% $9.45 GCA 6.7% $6.03 GEA 6.2% $9.43 GVA 2.1% $10.05 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Page 4
A Brave New World The opportunities are not restricted to the industrial sector alone. While we expect the spillover to touch the retail and office sector. While details are being worked out regarding the sale of cannabis in Ontario, retail spaces and neighbourhoods will be closely looked at. As these companies expand operations and generate revenue, the need for manpower and office space will also increase in the long run. The cannabis story may begin with the industrial sector but it surely won t end with it alone. At the end of the day we know the opportunity with cannabis in unprecedented. This will be even bigger than the end of prohibition of alcohol, because we have so many more people, acceptance and technology. The winners in this sector will be the first ones out with a consistency, customer service and high grade product. The winners also include investors and landlords in the CRE domain. Denver saw the cannabis industry account for 3.0 percent of the region s total warehouse market. Canada has a long runway of growth up ahead and as Provinces crack the cannabis business, we expect the good times to roll for the Canadian industrial CRE sector. Page 5
Gaurav Mathur Research Manager, Capital Markets +1 416 238 4455 Gaurav.Mathur@am.jll.com About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the third quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of over 80,000. As of September 30, 2017, LaSalle Investment Management had $59.0 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit ir.jll.com. About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. 2018 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.