When cannabis was legalized in Canada in 2018, experts projected a welcome windfall for commercial real estate, especially in hot spots like British Columbia that were well-positioned for a retail roll-out.
However, a year later, regions like Greater Vancouver and Kelowna have experienced a year-over-year decrease in total dollar value of 69 per cent across all commercial property types.
“While we anticipated the legalization of cannabis to drive prices and sales up in the commercial real estate market this year, a variety of factors have impeded commercial property growth,” says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada.
Ash explains that cannabis product supply issues, lingering stigmas, regulatory approval times and licensing restrictions are among the reasons the industry has underperformed.
Other economic factors, from oil and gas prices and trade disruptions affecting farmers, have also affected commercial real estate in Western Canadian markets like Regina, Edmonton and Calgary. The result is lower levels of commercial property activity across much of the West, with deflated prices and higher vacancy rates in some cities.
“Despite the pressures, we’re starting to see the market steady and 2020 looks more promising,” Ash says.
Regional rough spots, bright spots
As 2019 comes to a close, retail landlords still face challenges getting traditional commercial financing, due to reluctance among major banks to fund the high-risk industry. At the same time, retail locations still carry some stigma in the mainstream commercial market.
However, co-working spaces, sharp-eyed institutional investors snapping up real-estate bargains and long-term infrastructure players in the cannabis market are creating bright spots in the West for commercial property.
Co-working space has experienced a surge in popularity, with up to 1.5 million square feet in Greater Vancouver either occupied or under construction for co-working use: a 250 per cent increase since 2014 has increased demand for commercial property suitable not only for shared office space but warehousing space for retailers.
In Kelowna, where only one legal cannabis retailer currently operates, retail property performance is poised for a 2020 takeoff, with six more retailers seeking imminent provincial approval. Okanagan College is positioning itself to meet increased demand by offering training programs in cannabis business, regulation, sales, and cultivation.
Other balancing factors in Kelowna include the fact that owner-occupiers increasingly priced out of the Vancouver market are still attracted to residential real estate there, as are local investors and larger institutional buyers. The speculation tax has dampened interest somewhat from offshore and foreign buyers. Local developers are eyeing bigger mixed-use complexes with higher densities to maximize the potential Kelowna-area properties, with investors eagerly awaiting new property supply across all commercial sectors in this still-healthy market.
In Alberta, smaller local cannabis players are still seeking steady supply chains and cash flows, while larger players in the industry establish permanent market presence in anticipation of the legal rollout of edible cannabis products. Growth of co-working spaces, new downtown office towers and mixed-use projects still attract strong investment interest, but 2020 commercial real estate sales are expected to be slightly down from 2019.
Calgary, still impaired by the ongoing downturn of the oil and gas industry, is expected to experience modest growth in commercial real estate in 2020. Affordable facilities for cannabis production and logistic supply management provide a steady market of commercial buyers who recognize strong assets at a discounted price.
Regina’s commercial market is seeing low levels of activity and decreasing prices and rates, due not just to the slow cannabis industry but economic factors including global oil and gas prices, agricultural-trade instability and poor weather conditions. Uncertainty in the market there means bargains for investors. Similarly, out-of-province investors and institutional investors are eyeing low prices in Saskatoon, a trend that’s expected to continue in 2020, keeping prospects bright there.
Players like Regus are driving a co-working trend in Winnipeg, and downtown office-vacancy rates are prompting landlords to offer inducements and reinvestment in properties to make them more attractive. REITs, pension funds, private equity players and individual investors continue to eye Winnipeg’s higher cap rates and stable market conditions, driving steady growth there.
The West is not out of the woods — yet. “Economic recovery across the region is taking much longer than anticipated, negatively impacting the commercial property market,” says RE/MAX’s Ash. “While we anticipate modest growth in 2020, uncertainty... will continue to loom over the region.”
RE/MAX recently released its 2019 Commercial Investor Report, compiled from data from local real estate boards and brokerages, and including broker and agent perspectives on market features and trends.
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