Ontario will authorize the opening of roughly 20 new cannabis stores a month starting next spring, but according to one of the country’s largest commercial landlords, aspiring legal pot sellers in Canada’s largest consumer market may struggle to find a suitable retail space.
Last week, the province scrapped the lottery system that had been in place since early 2019, and had distributed 67 cannabis retail licenses. More than 200 new licenses are expected to be issued in 2020, Ontario Attorney-General Doug Downey told Cannabis Professional shortly after the Dec 12 announcement, but one of the country’s leading commercial landlords warns many of them could fail to acquire a physical space.
“The types of spaces [cannabis retailers] are looking for are limited in supply, so it is a question of whether we can find enough space for them,” Jonathan Gitlin, president and chief operating officer of RioCan Real Estate Investment Trust, said in an interview. “The spaces they are looking for, it is a smaller footprint, anywhere between 1,500 to 3,000 square feet. We have a number of those spaces, but our portfolio is 97.5 per cent occupied, so we just don’t have that much space to offer, particularly in the Greater Toronto Area, which is where their focus tends to be,” Mr. Gitlin said.
Securing a suitable retail space was a pre-qualifying condition for entering the second round of the province’s cannabis retail lottery in August, though the Alcohol and Gaming Commission of Ontario (AGCO) has not yet determined whether the open licensing process will maintain that requirements. Even if applications can be submitted without signing a lease in advance, getting an application approved is still no guarantee of actually finding a space.
Retail vacancy rates in Toronto hit a record low of just 1.9 per cent during the second quarter of 2019, according to the latest report from real estate management firm Jones Lang LaSalle.
“Average asking rents have continued to increase this year in both the GTA and downtown Toronto at 3.2 and 3.4 per cent respectively,” the Oct 1 report said.
RioCan is “getting a number of inbound calls from various retailers already at this point,” Mr. Gitlin said. The company had signed about 25 leases with prospective Ontario cannabis retailers for “well above” market rates during the period from July 2018, when the province announced an open allocation system for privately-owned pot store permits, and December 2018 when that system was temporarily replaced with the lottery.
Most of those 25 leases were terminated before the mandatory five-year term kicked in, Mr. Gitlin said, though a handful of players have chosen to continue paying rent on empty storefronts. Edmonton-based pot store chain Fire & Flower has spent hundreds of thousands of dollars holding onto a highly coveted Yorkville location on Toronto’s Bloor Street West for most of 2019 and RioCan is expecting multiple bidders for its most attractive properties.
“When a retail space becomes available and there are a lot of retailers vying for it, we are in the fortunate position of calculating which transaction would be the best for RioCan and its unit holders and then we assess from there,” Mr. Gitlin said. “I don’t know if you want to describe that as a bidding war but there is definitely, especially for the most coveted locations, a lot of action and competition.”