Retail N Illinois

Hashing out what recreational marijuana means for Illinois' retail sector

Hashing out what recreational marijuana means for Illinois' retail sector,ph1

New Year’s Day 2020 will usher in a new era in Illinois. On that date, the limited sale of recreational marijuana will be legal—a move that will have wide impacts not just on society but the commercial real estate industry as well.

Medical marijuana has been legal in Illinois for more than six years, but the deregulation of recreational use will alter the landscape. Who will operate these new dispensaries? Will property owners and nearby residents balk at this expanded entry into the retail ecosystem?

“As everybody understands this better, and as the regulations and requirements become clearer, I think we will become more nimble,” said Deena Zimmerman, vice president at SVN Chicago Commercial. “I think it will be a slow and steady rollout, but I see it being really successful if it’s done the right way.”

Sheila Loberg, director of development at Loberg Construction, sees parallels between cannabis legalization and another segment that her firm has a lot of experience with, medical retail. What was unheard of years ago is now the fastest-growing retail sector as more and more shopping centers, single-tenant net lease buildings and even malls are seeking out medtail tenants.

“The ‘retail apocalypse’ is just fear mongering by some investors,” said Loberg. “Repurposing some of these underperforming retail spaces has been a great opportunity for medical users to come in.”

For those operating in the retail sector, cannabis deregulation can bring new options to the table just as medical uses did. Looking for the latest experiential retail concept? Well what’s more experiential than marijuana?

Ever since the drug was decriminalized in East Coast and West Coast states, markets like Seattle, Denver and Portland, Oregon have cultivated cottage industries around marijuana tourism. Illinois is poised to do the same in the Midwest.

Michigan legalized recreational marijuana last year but didn’t begin issuing licenses to dispensaries until this month. The two states are essentially on even footing to capture Midwest-based marijuana tourists, with an edge going to the Chicago market which currently draws three times the visitors that Detroit does.

Starbucks and McDonald’s may be the most ubiquitous retail locations in the country, but in some markets, according to Marijuana Business Daily, they are outnumbered by dispensaries. In Denver, for example, there are 1.6 dispensaries for every Starbucks and there are five times as many McDonald’s restaurants. It’s even more stark in Portland, Oregon, where dispensaries outnumber Starbucks and McDonalds by 1.7:1 and 9.1:1, respectively.

Politics may prevent Illinois from seeing a similar saturation as those more established markets in the long term. It will certainly be less saturated from the outset, as Illinois has instituted a graduated launch. The Illinois Department of Financial and Professional Regulation (IDFPR) is limiting new dispensing licenses to 75 by May 1, 2020, though that number may grow to as high as 110 by December 21, 2021.

As for how these dispensaries will look and operate, the extant medical dispensaries are a good guide. There are some key differences, however, and the changes coming to Illinois’ existing dispensaries could be considerate.

“It’s a startup industry with 2,000 years of user experience but very little data,” said Loberg. “If you take the fundamentals of construction and design and then you apply it to the cannabis market, it’s no different. But we are going to have to create prototypes as we go for these businesses.”

Medical consumers, for example, may require access to a consultation room, whereas recreational users will desire a more comfortable, social experience. It’s the difference in design between a pharmacy and a boutique shop. Security is a concern for both types of dispensary, but recreational users may be off-put by overt security measures.

“Are the recreational licenses going to eventually grow into what’s happening in Las Vegas where they have consumption lounges?” Loberg said. “If we are we going to build these spaces, flexibility is going to be super important.”

Who are the likely dispensary operators in Illinois? According to Zimmerman, there are existing medical providers who will pivot to recreational sales, local startup groups looking to get in early and established providers who have proven themselves in other markets who are perhaps better prepared to launch in Illinois. Zimmerman, who has been operating in this space for years, is lucky enough to be able to vet out and align herself with the latter group.

“It’s tough out there. If you’ve ever seen what the application looks like, it’s very, very detailed,” she said. “We are seeing startups in the space and there will probably be a flood of them. But I think there are some really strong local groups that are financially sound and know what they’re doing, so I think we’re going to see a nice mix of both established players and mom-and-pop shops.”

It’s not just the who, but also the where. As of this writing, the IDFPR has granted 14 recreational sales licenses to three Chicago dispensaries, several suburban locations such as those in Buffalo Grove, Elmwood Park, Joliet and Mundelein, as well as four downstate dispensaries in Canton, Champaign, Effingham and Grandview.

The three Chicago locations are in the Brighton Park, Lakeview and Uptown neighborhoods. The city of Chicago has instituted an exclusion zone that covers a large portion of the CBD, mostly in the Loop, Streeterville and the Gold Coast.

While the prohibition of downtown marijuana sales may seem like a missed opportunity to capture tourist dollars, there is still overlap between tourism locations and budding sales. The Lakeview location is only blocks away from Wrigley Field so the potential there is huge. In addition, the exclusion zone does not include the red-hot Fulton Market District or the nascent South Loop, so watch out for dispensaries in those areas.

“I believe in this, I think it’s a great fit anywhere and it can potentially bring some really wonderful things to a neighborhood,” Zimmerman said. “Will some of these communities that opted out eventually someday opt back in? I’m guessing yeah, they will. They’re concerned about what their constituents are concerned about, but I don’t think they should be because it’s so highly regulated.”

While some pushback was to be expected, there are many instances where it’s clear that not just investors and property owners, but local residents are ready to welcome recreational marijuana dispensaries. The potential tax revenues are just too enticing to pass up, but the stigma has also been ebbing year after year.

“I’ve talked with officials and building owners in municipalities as well as areas of the city that are really open to it,” said Zimmerman. “I have a flurry of sites that are sent to me from all over the place, from owners who are savvy and understand what a great financial gain this could be for their particular building. There are always going to be naysayers who aren’t comfortable with it, but as this rolls out, people will see how great this can be for a community and for the state.”