It's The Wild West As Cannabis Providers Jockey For Retail Spaces
When the Illinois legislature passed a law last spring legalizing recreational cannabis starting Jan. 1, it set off a dealmaking rush among cultivators and a months-long scramble to secure Chicago retail properties where providers could sell the product.
That jostling began even before the city passed its own ordinance in the fall governing sales, with at least several deep-pocketed providers securing more potential outlets than they could use.
Now that city officials have set down rules and granted initial licenses, lease negotiations between cannabis companies and landlords across the city are sure to intensify as the lucky license holders struggle to beat their competitors to market and meet the stringent zoning requirements.
“It’s going to be the Wild West out there as we figure out who is going to go where over the next few months,” The Lord Cos. President and Managing Partner Keith Lord said. “It’s about the biggest thing since the repeal of Prohibition.”
As in the 1930s, retailers are trying to establish a new retail category almost overnight, and Lord, a Chicago-based owner, developer and retail broker, has been fielding calls from all directions, for his own properties and from clients with buildings targeted by cannabis retailers.
Faced with additional months of struggle to secure the necessary special-use permits and community support, the retailers won’t find it easy to be first to market.
“They’re nuts if they aren’t locking up spaces already,” Lord said.
The companies that dominate legal cannabis sales have mostly kept quiet, refusing to divulge where they plan to open shop, but experts say it has been a bit of a free-for-all. Other firms have decided to play it relatively safe while navigating the many rule changes city officials made the past few months.
“There are some people doing very aggressive things,” Grassroots Cannabis CEO Mitch Kahn said. “We threaded the needle between an aggressive and conservative approach; I’ll leave it at that without getting into specifics.”
Mayor Lori Lightfoot’s administration set the stage for this competition by placing strict limitations on where recreational sellers could operate.
The state, hoping to avoid the chaos that enveloped the legal cannabis market elsewhere in the U.S., allowed the dozens of existing medical cannabis dispensaries to corner Illinois’ recreational market. Only these dispensaries, at least initially, can get recreational licenses, one for their current sites, and another for a new, recreational-only location.
Lightfoot said she did not want Chicago’s cannabis shops clustered in the city’s top tourist districts, making it difficult for many residents to access the product. She established rules banning cannabis sales on the tourist-heavy Magnificent Mile or in the Central Loop, and divided the rest of the city into seven zones, initially limiting each to seven total medicinal and recreational shops.
Eleven medical shops in Chicago opted to serve both patients and new recreational customers. Under the city rules, that left 38 out of the total 49 spots available, and 31 providers from across the region and downstate vied for these chances in a sports-draft-like lottery process run by the city.
Dozens of cannabis company representatives crowded into a small room in City Hall the morning of Nov. 15 and watched as Zoning Board of Appeals Chairman Farzin Parang mixed up their recreational license applications in a metal cylinder, and pulled them out one by one, letting each licensee then pick a neighborhood.
The most-desired locations were apparent rather quickly. After Parang pulled out just 12 applications, the companies had snapped up all available licenses in the North and Central districts, which include high-traffic, affluent retail trade areas such as Wrigleyville, River North, the Southport Corridor and the West Loop. Applicants left unclaimed several available licenses in the Far South and Southeast districts.
Selecting a neighborhood is just the first in a string of hurdles dispensaries will face in locking down sites. The product remains controversial, and most municipalities, including Chicago, plan to tightly restrict sales.
Lightfoot and the City Council narrowed the number of Chicago buildings available by mandating dispensaries be located at least 1,500 feet apart, and at least 500 feet away from schools.
“Zoning is always a major challenge, so you just can’t throw in new stores wherever you want,” Mosaic Construction Client Relationship Manager Albert Marks said.
Northbrook, Illinois-based Mosaic has constructed dozens of cannabis shops nationwide, and plans to help at least one Chicago provider build out its new recreational spaces in the coming year.
The design process will also have unique challenges. Cannabis is still illegal under federal law, and that makes it a largely cash-only business. Although all sellers want aesthetically-pleasing shopping environments, security concerns are paramount, and their outlets need spaces wide enough for Brink’s trucks to pull in and out.
Most suburbs typically have a lot of suitable spaces in wide-open strip malls or office parks, but Chicago’s tighter streets provide fewer options, Marks said.
“It’s going to be a little trickier, and require a lot more planning," he said.
The 1,500-foot restriction may be the most troublesome hurdle, especially as the new license holders are playing it safe, and not publicly releasing the locations they have identified as potential marijuana shops.
“My competitor could be working on their own dispensary just one street over, well within 1,500 feet, and then you’re in a race with hundreds of thousands of dollars on the line,” BW Strategies Director Ryan Brandt said. “Speed to market will be a huge advantage in the permitting process.”
Brandt’s firm consults with a number of U.S. cannabis operators on acquiring spaces, including PharmaCann and MedMen, two of the nation’s largest, both of which own several Illinois dispensaries that participated in the Nov. 15 lottery.
MedMen and PharmaCann began locking in spaces even before the lottery took place, as did several other deep-pocketed firms. With all the restrictions on where cannabis shops can open, it gave landlords opportunities rarely seen in the retail world.
“We were left with a small batch of available parcels, and it created high expectations from a lot of landlords, and many felt their properties were pieces of gold, making negotiations more challenging,” Brandt said.
Landlords were asking cannabis providers to pay at least 10% above market rates on a per-SF basis, and up to 50% for the best locations in the hottest areas, he said. The worry that last-minute zoning changes could still knock further portions of the city out of consideration has given negotiations an even sharper edge.
But the amount of cash cannabis sales generates brings a flurry of investment, and most local providers are not mom-and-pop shops, but businesses with the capital needed to overcome all of those potential stumbling blocks.
Kahn’s Chicago-based Grassroots Cannabis raised $90M from investors earlier this year. In the summer, Wakefield, Massachusetts-based Curaleaf said it would buy the firm for $875M. Green Thumb Industries and Cresco Labs, two other big players that joined the rush for Chicago licenses, went public last year on the Canadian Securities Exchange.
And by the time Parang began pulling applications out of the drum, some were ready.
BW Strategies months ago began drawing 1,500-foot circles around existing medical dispensaries, and 500-foot circles around schools, Brandt said.
“If a property checked those two boxes, we began a conversation with the owner," he said. “We already had multiple leases signed in each of our districts.”
PharmaCann in particular lucked out in the lottery. Two of its suburban dispensaries were picked fourth and fifth, and the company promptly chose the Central district for both. The last Central and North district licenses were taken when Parang drew out the name of suburban Romeoville’s Midwest Compassion Center, also owned by PharmaCann, for the 14th pick. The company went with the Northwest sector this time, just before its last spot was taken.
Other big players were also lucky that Friday morning. Cresco Labs had three dispensaries with applications in the drum. Its PDI Medical in suburban Buffalo Grove and MedMar Lakeview on Chicago’s North Side were picked first and sixth, respectively, and Joseph Caltabiano, a former mortgage banker and co-founder and president of Cresco, quickly chose the Central district for both.
Like PharmaCann and MedMen, Cresco was prepared, Caltabiano said, and the size and sophistication of its operation came into play.
“I come from a real estate background, and our team includes real estate developers and zoning attorneys, so we were able to prep a multitude of locations, and spent the most amount of time in the Central district,” Caltabiano said.
That has meant a lot of conversations with landlords, aldermen, and local business and community groups, getting them comfortable with cannabis, he said. The company’s outreach includes discussions of security arrangements, and videos that showcase Cresco’s Sunnyside cannabis brand, which Caltabiano said is designed to remind local residents of wellness-related products, rather than stereotypical head shops.
Cresco generally seeks out buildings between 3K SF and 10K SF, and prefers simple vanilla box construction, the type of buildings it can put its stamp on quickly.
“An old bank is a great option,” Caltabiano said.
Cresco readied several locations and even engaged in lease negotiations, but there was one step it would not take.
“We put a hold on any final execution of any leases, because we did not want to risk the capital of Cresco on something that is literally a lottery pick,” he said.
That capital is also uniquely difficult to line up for dispensaries.
Federal prohibition confines cannabis to a legal gray zone, and properties used for sales can’t have federally insured bank debt, Brandt said. So providers must find debt-free properties, or work with owners willing to restructure the debt.
“There are plenty of landlords that wouldn’t rent to us, and there were even landlords that would not rent us space to use for our corporate headquarters,” Caltabiano said.
Brandt said cannabis companies generally prefer dealing with independent owners instead of large institutions like REITs, which usually worry more about running afoul of federal law. That pushes dispensaries to seek out free-standing buildings with simple debt structures, rather than mixed-use buildings with complex financing.
There are two things working in dispensaries' favor: the potential of the industry and the weakness in the retail market.
Cresco officials found that retail landlords, even in the coveted Central district, were willing to hold open potential spaces for cannabis-related businesses, both due to the retail sector’s evisceration by internet competition and in anticipation of the eventual payoffs.
“The retail rental environment is softer than it has been in years, so landlords are a little more flexible,” Caltabiano said.
The Chicago-area retail vacancy rate rose from 8.6% in 2013 to 11.6% earlier this year, according to a recent report from CBRE. Although the rate fell to 11.1% in the third quarter, company researchers expect additional bankruptcies and store closures will plague the market in the coming year.
And if any landlords raised questions about the stability of cannabis-related tenants, Brandt said he pointed out that the providers have successfully run medical cannabis outlets for several years now without incident.
If there is still reluctance, the amount of rent a cannabis operation can afford may tip the balance, Brandt said.
“We can say, ‘look, what if we pay you 10% to 15% above market?’ Then they are interested,” he said.
Caltabiano said his firm will move quickly next year once it secures special-use permits from the city.
“We’re capable of getting this done in an accelerated timeline, and our desire is to be open by the end of the first quarter,” he said.
Chicago-based Green Thumb Industries, which operates dozens of dispensaries nationwide, had three of its Illinois medical dispensaries in the lottery, but had to make do with the 16th, 17th and 26th picks and won’t commit to such an aggressive schedule.
“It will be in 2020, but I don’t know when in 2020,” Senior Vice President for Government and Regulatory Affairs Dina Rollman said.
The firm’s relatively late picks were not disappointing, she said, even though it got shut out of the popular locations. It chose the Northwest, West and Southwest sides.
“A great location for us does not necessarily mean tourists,” Rollman said.
Rollman added that Green Thumb officials don’t mind taking time to build the community relationships needed to secure city approval.
“While we are a for-profit business, when we go into a community, it’s for a long-term relationship,” she said. Still, it has already surveyed its sectors for potential sites. “Now that the lottery is over, the real work begins, and we have a real estate team that hit the ground running.”
Not every cannabis dispensary in Illinois is backed by a deep-pocketed, multistate operator, and several jumped into the lottery hoping their smaller sizes wouldn't be a barrier.
“We’re one of the only independently owned dispensaries in the city,” Dispensary 33 Director of Marketing and Patient Outreach Abigail Watkins said.
The medical provider in the Andersonville neighborhood opened in 2015, and was relatively lucky on the morning of the 15th. Parang picked its application eighth, and even though one Central district license was still available, Dispensary 33 chose the West district.
“That was our first choice; the Central district is smaller, with less space, and has all these big MSOs jockeying for position,” Watkins said.
She compared Dispensary 33 to a mom-and-pop shop, one with loyal customers who appreciate its neighborhood feel. And unlike the big players, the Andersonville dispensary could not work on multiple deals in its chosen area.
“All we could do was scout out locations and hope we got a good pick with the lottery,” Watkins said.
The available slots in the west district were all eventually taken, so Dispensary 33 will potentially face competition if its chosen recreational-only site is within 1,500 feet of another license holder, she acknowledged.
“What it comes down to then is whoever signs a lease first,” she said.
But no matter how all that plays out, Dispensary 33 will soon begin selling recreational cannabis. Like many of the state’s medical dispensaries, it also applied for and received a license to sell recreational products at its existing site. It staffed up the Andersonville location, which opened with about six people, but now employs dozens. Dispensary 33 also remodeled the interior so it can serve an onslaught of customers, as well as its regular patients.
“Our Andersonville location will be open on Jan. 1 at 9 a.m. for the first time as a dual-use facility,” Watkins said.
The Lord Cos. will continue weighing its options, and negotiating with the cannabis companies.
“They tend to pay about a 10% premium in rent," Lord said. "So I’d love to have one.”