Hamilton recently celebrated the grand opening of Canna Cabana, the City’s first legal cannabis dispensary — an event so monumental that Mayor Fred Eisenberger even held a ribbon-cutting ceremony to mark the occasion. Hamilton’s second legal dispensary known as Hello Cannabis opened its location in Dundas a few weeks ago. Lost in the festivities of these two legal dispensaries heralded as a big step for the City, however, is a moment of reflection on how this industry transformed Hamilton in a wild two years and the economic fallout legalization brought.
In July 2018 (prior to the legalization of cannabis for recreational use), the Hamilton Spectator wrote an article about the abundance of (illegal) cannabis dispensaries in the City. Through their research, they estimated there to be more than 80 — yes, eighty — dispensaries operating within municipal limits. The article underscored the sheer number of dispensaries operating by pointing out that there were only 76 Tim Horton’s locations in the City. Hamilton had more dispensaries per capita than any other city in the country, becoming the Weed Capital of Canada.
The reasons retail cannabis flourished in this city is often debated and the lazy answer is that our residents loved the herb more than the next city. The more nuanced and compelling theory points to the factors at play within the commercial real estate sector and the motivations of its players, which created fertile soil (pun intended) for the growth of the cannabis “Grey Market”. The typical commercial players — tenants, landlords and lenders — each with different motives but together forming a symbiotic relationship, was the true catalyst.
Let’s start by examining the tenant. For the most part, commercial tenants have two primary desires: finding a location near their target market that will maximize sales and paying the lowest rent possible. With an abundance of vacant storefronts scattered throughout this city and commercial rents near the lowest of any city in Southern Ontario, dispensaries had their pick of the lot and were able to open up shop at a low cost anywhere in the city, from Stoney Creek to Dundas (with the highest concentration of them opening in the inner city where vacant space is most abundant and rent is cheapest).
Commercial landlords, on the other hand, are typically adverse in interest to tenants. More particularly, while the tenant seeks to minimize rent, the landlord seeks to maximize it. For Hamilton’s landlords, especially those with properties in the inner city whose “For Rent” signs have been collecting dust, the cannabis industry (whether or not yet legal) was welcomed with open arms. Not only did the industry bring prospective tenants, it brought prospective tenants willing to pay rents that were significantly above market average (usually in cash and usually with hefty prepaid rent and security deposits) — the risk premium of permitting a perhaps morally-acceptable, but still illegal, business to operate out of one’s property.
The City’s attempts at cracking down on dispensaries by going after landlords for bylaw infractions were largely ineffective given the extremely favourable rents and, in any event, led to what has been described as a “whack-a-mole” situation given the seemingly-endless supply of available real estate. It was an offer too good for landlords to refuse and it was this eagerness that helped contribute to the wildfire-like spread of cannabis dispensaries throughout the City.
The last, and arguably most influential player in this commercial real estate tale, is the lender — more specifically, the alternative lender. Similar to the tenant’s balancing act between the best location and the lowest rent, a lender has a balancing act between profit and risk. Many of us can relate to the personal inquiry a bank performs when processing a residential mortgage application. They investigate an applicant’s income, length of employment, stability of income and employment, savings, credit rating, etc.
A commercial mortgage lender will use the same fine-tooth comb to determine the risk of a commercial real estate venture. They will consider a property through the building’s location and quality of its tenant(s) (if any), including length of tenure and revenues generated, etc. They will investigate the property’s history, the neighbourhood and any environmental concerns. After taking all these factors (and many more) into consideration to determine value and risk, they reach a conclusion on whether a property is worthy of lending.
As a generalization, it is my experience that, given the above-noted economic realities of our commercial real estate market, lending institutions (particularly, the A lenders like the big five banks) see Hamilton as risky and aren’t keen on lending here. However, there has been a growth in recent years of alternative lenders (including unregulated, private lenders). Even though the borrower faces higher fees and interest with such lenders, they may be able to avoid the scrutiny, inflexibility and conditions that often come with using RBC, TD, and the like.
One such condition that the banks were placing in their loan documents was that borrowers could not lease out the premises to recreational cannabis dispensaries. This condition was circumvented through the availability of alternative lending options. Through the use of alternative lending solutions, financing was not necessarily a hindrance to the Hamilton landlord wishing to capitalize on this emerging market.
The perfect storm between a growing industry eager for locations, desperate landlords and the absence of any lending restrictions — in basic economic terms, sufficient supply to match a high demand — is the more complete story as to why the cannabis industry flourished and earned Hamilton the title of “Weed Capital of Canada”. So, when Mayor Eisenberger cut that ribbon to mark the start of something great, what was the City really celebrating? At its peak, the retail cannabis industry operated 80 locations in Hamilton. Given the Province’s cap on cannabis retail licences, there are now only two dispensaries in the City likely to survive.
At an average size of 1,000 square feet per location (a conservative assumption), they occupied 80,000 square feet of commercial retail space throughout the city. With that much inventory swallowed up, rents increased. This economic lift is harder to quantify, but should be mentioned nonetheless. Some straightforward arithmetic reveals that at an average rental rate of $15 per square foot (a conservative assumption), local Hamilton landlords were earning $12 million in rent every year from the retail cannabis industry. If we use Canna Cabana as a benchmark, they employee 15 mostly full-time employees at their 2,500 square foot location in the Centre on Barton. If we extrapolate that employee ratio, it means each 1,000 square foot dispensary employed about 6 people. 80 locations employing 6 people each is 480 people employed by the industry. Assuming a modest $15/hour wage, that’s $15 million in annual wages lost by Hamiltonians — in addition to lost revenues — as a result of the Province restricting the now-legal retail sale of cannabis.
So when we see the Mayor cut that ribbon to celebrate the opening of our first legal cannabis retailer, let’s also remember that politics forced this city to lose hundreds of jobs, robbed local landlords of rent, and ravaged any momentum the retail commercial sector experienced back to streets of empty storefronts.