New York's Cannabis Cultivation Space Race Stuck At Starting Block
As dozens of would-be cannabis retailers are looking to set up shop in New York City storefronts once licenses are approved, their suppliers are planning to grow their businesses outside of the Big Apple.
But exact locations for most of these prospective cultivators are still up in the air, experts say, as the state government delays its timeline for the rollout process. That has left companies on the prowl for real estate hesitant to execute deals.
“New York seems to be on a little bit of a slower timetable than New Jersey,” said Robert DiPisa, an attorney at Cole Schotz P.C. and co-chair of its cannabis practice. “It’s like a dance … They're definitely engaging with ownership, but at the same time, they're not as quick to lock up the property, because they're trying to offset risks associated with acquiring it too early.”
The Cannabis Control Board — housed in the newly instated Office of Cannabis Management and consisting of members appointed by Gov. Andrew Cuomo and the state legislature — is set to helm the rollout.
But lawmakers left Albany at the end of June without voting on these appointments, setting the date for the first convening of the board, and the announcement of the regulations, back to the beginning of 2022 at the earliest, barring a special session, according to Lippes Maxias Wexler Friedman Senior Associate Ryan Stearns, the co-leader of the Buffalo-based firm's cannabis team.
Many who are already active in New York's cannabis market were expecting applications to open before then, sources said, and the delay could have major negative impacts on the legal cannabis industry.
“It does take 18 to 24 months to turn on a functional cultivation facility, so if the state doesn’t move pretty quickly, you’re going to be undersupplied for a while, which isn’t good,” Inception Real Estate Investment Trust CEO Richard Acosta said.
Right now, only 10 operators are allowed to start cultivation for adult-use cannabis: those with existing medical cannabis licenses, including multi-state operators like REIT Columbia Care and Green Thumb Industries, both of which recently signed deals for cultivation sites.
Columbia Care paid $43M in May for a 740K SF greenhouse in Riverhead on Long Island, 75 miles from Midtown, where the company is headquartered. Green Thumb Industries signed a lease for a cultivation facility in an old prison in Warwick, about 50 miles north of Manhattan.
Altogether, the medical cannabis companies with an early start have 350K SF of cultivation space in a state with a population of 19 million, according to Acosta.
With research showing that New York City residents consume 77 metric tons of cannabis a year alone, that leaves a deficit of cultivation space compared to the number of people in the state, he said. By contrast, Massachusetts, with a population of 7 million, has 3M SF of cultivation space, he said.
“The industry view, and my view, as an investor in the industry both in and outside of real estate, is that New York needs to fast-track cultivation beyond the 10 [operators],” Acosta said. “New York needs to just open up the spigot quickly for licensing to kind of push the illegal and illicit market out and also really allow and give a shot to the local social equity participants.”
Some members of the legislature have recognized the urgency. Tuesday night, state Sen. Jeremy Cooney, a Democrat from Rochester, proposed legislation that would temporarily allow cultivators to start growing this year before the regulations or license applications are rolled out.
Whenever these prospective cultivators do start to sign deals for real estate, the geographic trend set by cultivators that have already secured space is likely to continue. With limited industrial supply in New York City and rents only rising, these companies are setting their sights on large greenhouses or industrial buildings located up to a few hours outside the city.
“The way you have to look at New York City is to think of it as a doughnut. The real estate that's located in the circle of the doughnuts — such as New York City, Brooklyn, Queens — those areas are almost untouchable because of how high the demand is,” DiPisa said. “Cultivators are going to have to start to look at the outer rim of that doughnut.”
These companies look for areas with good access to highways, water, labor and power, but also where real estate costs are lower.
Paul Smithers, president and CEO of the cannabis REIT Innovative Industrial Properties, said it makes more sense for cannabis cultivators to put down roots in more rural areas, where government is more supportive, zoning is more amenable and security protocols are easier to put into place.
“The value proposition of a regulated cannabis cultivation and processing facility being located in or near densely populated cities such as New York is not necessarily compelling in our opinion, as compared to facilities focused on general goods distribution,” he told Bisnow in an email.
IIP owns a property in Hamptonburgh, New York, 68 miles from New York City, which is leased to PharmaCann, and a property in Perth, New York, 188 miles from New York City, leased to Vireo Health, Smithers said.
Much about the best types of cultivation facilities is an ongoing debate, including whether retrofitted greenhouses or industrial buildings are more cost-effective for these cultivation facilities.
“Really any greenhouse or any industrial unit can work,” said Minto Bose, a principal at Elemint Consulting, who is advising Columbia Care on its retrofit of the massive Long Island greenhouse it purchased earlier this year.
Bose declined to give price details on that project, citing confidentiality agreements. Generally, retrofits to industrial buildings costs $300 to $600 per SF, he said.
In that specific project, irrigation, mechanical and HVAC systems will be upgraded, and Columbia Care is adding blackout walls to block daylight at certain points in the plants' growing process.
These spaces will likely be large. Based on the information the state has provided about what the recreational market regulations will look like, operators will only be able to secure a single license in the first round, Cannabis Real Estate Consultants founder and CEO Erich Rubio told Bisnow, which likely means operators will want to grow as much product as they can with that single license.
“Right now, [nationally], there's a big demand for these large indoor facilities. And I'm assuming that's what we're going to see more of in New York,” he said. “I'm assuming they want to go as big as possible."
CORRECTION, JULY 23, 9:45 ET: Retrofitting industrial spaces can cost between $300 to $600 per SF. A previous version of this story stated that retrofitting a greenhouse can cost this much. This story has been updated.