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Chi-Town Cannabis Retailers Scramble For Space As Legal Weed Rolls Out

The story of Illinois’ first week of legal recreational cannabis was one of long lines with giddy customers — and looming product shortages that could last for months.

Behind the scenes, where most potential providers are still hunting for retail spaces, brokers say the scramble for new retail options has gotten even more intense than last year. It's a competition that could accelerate throughout 2020, as the state’s planned expansion goes forward, and officials award dozens of new recreational licenses.

Whether all these providers can find landlords willing to rent them spaces, sign leases and open for business this year remains an open question. It's also one that comes with the stigma attached to cannabis and the many restrictions on where it can be sold. But attitudes toward the once-illegal product may be changing.

Disp. 33 line
The line outside Dispensary 33 on Jan. 1.

“When I first started representing medical cannabis clients in 2013, developers and landlords would hang up on me, and providers had to take whatever space they could get,” SVN Chicago Commercial Vice President Deena Zimmerman said. “Today we have many owners who understand the value, from a leasing perspective, of having a cannabis tenant, and that it’s a great long-term play.”

Many of the original medical cannabis stores were tucked away into inconspicuous buildings, sometimes in suburban business parks far from the bustle of true retail trade areas. But the millions of dollars in sales generated each day by the new industry goes a long way toward removing the cannabis stigma, and is already opening the eyes of property owners, she added.

“We can now look at prime retail properties, and we legitimately could have started looking on Michigan Avenue,” had Chicago not banned cannabis sales in much of the downtown.  

New Year’s Day, the first day recreational product was legally sold, presented scenes that any retail space owner would find heartening. In some places, it had the look and feel of a street festival.

“We’ve had thousands of people come out, and on the first day, even some of our medical patients were first in line when we opened at 6 a.m., simply because they wanted to be a part of the first recreational sales in Illinois,” Dispensary 33 Director of Marketing and Patient Outreach Abigail Watkins said.

Located in the Andersonville neighborhood on the North Side, Dispensary 33 is one of the state’s largest providers of medical marijuana, serving roughly 3,500 patients. It is one of 11 Chicago shops that opted to serve both existing patients and new recreational customers.

“The whole neighborhood was in on it, with all the neighboring businesses opening up on the morning of Jan. 1, which is unusual, and some were even advertising deals to get people in the door,” Watkins added.

“It’s about as crazy as we expected it to be, and because many people were out of town for the first few days, we don’t even know how deep the demand is,” The Lord Cos. President and Managing Partner Keith Lord said. His firm owns a number of retail properties in Chicago, and like many landlords, he is currently in talks with eager cannabis suppliers.

Such high volumes, and the potential for new sales revenue and taxes, could attract the attentions of both landlords and suburban municipalities that previously ruled out accepting cannabis stores.

“Maybe this is the wake-up call they needed to reconsider their position,” he said.  

Dispensary 33 served more than 1,000 customers that first day, and nearly the same number on each of the next two days, far more than the typical weekday in 2019, when about 150 shoppers would show up, Watkins said.

Lord
Scott Fithian, Michael Flinchbaugh, Keith Lord, Turhan Erel and John Nolan.

The providers are required by law to ensure medical patients continue getting served, so some stores temporarily shut down recreational sales during the past week, or limited the amounts new customers could buy. Dispensary 33 dealt with their product shortages by limiting the number of recreational customers it serves each day, Watkins said.

“Every dispensary is just adapting day by day, and learning as they go,” she said.

Customers statewide spent nearly $11M in the first five days, according to Brightfield Group Cannabis Research Manager Andy Seeger, mostly on par with demand in other states that legalized.

But the severity of the product shortages is not. He attributes that to the state’s medical growing operations having only about six months between Gov. J.B. Pritzker signing the legislation, and opening day for recreational sales. Colorado growers, by contrast, had more than one year to ramp up production.  

“It is important to remember the timeline of Illinois and how accelerated the path to legalization has been compared to other states,” he said.

Oregon’s governor signed a bill last summer that allows its providers to import marijuana from other states, but Seeger said that’s a risky move, and he does not expect Pritzker to take that step.

“Crossing state lines would be asking for federal intervention,” he said.

That means low supplies will continue plaguing the existing dispensaries, as well as the many getting ready to open. The state made 49 recreational licenses available for use in Chicago last year, and the city held a November lottery to decide where the license-holders could locate, but only existing medical providers like Dispensary 33 were able to begin city operations on Jan. 1.

The remainder are still choosing sites, signing letters of intent, and meeting with neighborhood stakeholders to secure local support.

“You’ll start seeing the new stores open at the end of March or the beginning of April,” Lord said, although these businesses’ intensely competitive nature means he can’t divulge any details about the Chicago deals his firm is negotiating.  

The lack of product, however severe, won’t have much impact on the ability of this new crowd of retailers, or those who get Illinois’ next 75 licenses, which it will award in the spring, to at least open for business in 2020, Seeger said.

“More likely, the shortage will cause the craft grower licenses to be snapped up while the large [Multi-State Operators] scale up their cultivation sites,” Seeger said.

The Illinois Department of Agriculture will start accepting applications for 40 craft growing licenses in February, which will allow small, specialty cultivators to join large, established operators like Green Thumb Industries and Cresco Labs, both publicly traded MSOs.

Investors started pouring capital into the MSOs last year, helping fund the needed expansions, but it’s going to take time before supply matches demand.

Eva
East Village Association meeting on Jan. 6.

Setting up a new greenhouse operation takes about four months, while growing and processing the plants takes another four, according to Verano Holdings Chief Growth Officer Sammy Dorf. The Chicago-based MSO, which also runs several Illinois medical retail outlets, has begun ramping up production.

“It’s a substantial undertaking, and although I can’t discuss actual numbers, we will keep expanding as demand continues to increase,” he said.

The overall shortages don’t really worry Dorf. It’s the inevitable result of the state’s decision to grow the industry step-by-step, keep a tight lid on quality control, and avoid the free-for-all that engulfed some cannabis markets, he said. Oregon, for example, by 2018 handed out more than 1,000 growing licenses, leading to soaring production, a pricing collapse and general chaos.

“Illinois is the leader, and has set up the best cannabis programs we’ve seen in the U.S.,” he said.

The state’s careful approach may help make cannabis providers more acceptable as neighbors.

The East Village Association, a neighborhood group in an affluent area on the Near Northwest Side of Chicago, held its monthly membership meeting on Jan. 6 at Roots Pizza, 1924 West Chicago Ave., and listened to a local businessman pitch his plan to open a dispensary nearby.

Scott Weiner, co-owner of Fifty/50, a company that runs Roots, told the crowd he and a group of partners, including former 47th Ward Alderman Ameya Pawar, want to open a combined cannabis dispensary, medical clinic and wellness spa. It would ideally be two doors down in an existing three-story building at 1914 West Chicago Ave.  

Weiner’s group, which Dispensary 33 is advising, has a long way to go before it can start redeveloping the property. It still has to put in its state application, and if accepted, the partners still need a little luck at the city’s next lottery, and win one of the open slots on the Northwest Side.   

But after his short presentation, the members unanimously approved his bid. The move did not surprise Michael VanDam, the association’s president.

“The sense here is that cannabis is coming, and we want the neighborhood to be involved and work with someone like Scott, who everyone already knows," he said.

That comfort level is partly why SVN’s Zimmerman says she thinks that the restrictions on cannabis locations, which in Chicago must be at least 1,500 feet apart, and at least 500 feet away from schools, ultimately won’t be a barrier.

“I can’t tell you the locations we have locked down, because they are secret, but one-quarter to one-third were off-market transactions, where the owners solicited me and my team," she said. "That did not happen in 2013 and 2014.”

She has even seen investors poking around and asking about opportunities to buy properties with cannabis tenants.

“For the first time ever, we are talking about cap rates. It’s super exciting to be in cannabis right now. It’s just starting to stretch its wings.”

Join WBS Equities' Wendy Berger, Green Thumb Industries' Dina Rollman and Richard Acosta from Inception REIT, among many others, at Bisnow's Chicago Cannabis Event on Feb. 6.