Alternative Investment Spotlight: Greenhouses

Investing in Greenhouses

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Marijuana cultivation is a huge growth opportunity for investors—pun intended! As more companies enter the recreational marijuana space, these companies will need real estate for their growing operations.

Table of Contents - Investing in Greenhouses

While Canada has allowed medicinal marijuana use since 2001, the Cannabis Act of 2018 legalized recreational marijuana nationwide. The "Cannabis 2.0" era began in October 2019, making cannabis derivatives like edibles, vapes and extracts legally as well. Demand for cannabis in Canada continues to rise as it is currently the largest nation to legalize the substance.

What does this have to do with real estate investors? Large-scale cannabis operations are either indoors, in greenhouses or hybrid space. Before legalization, operations were primarily indoors to conceal the product. Today, marijuana farmers are finding it's more cost-effective to build new greenhouses or retrofit existing structures. Investors are joining commercial grow operations as farms work to meet demand.

Greenhouses are a solid alternative investment because of their cost and scalability. They are an excellent entry point for real estate investors interested in joining Canada's fastest-growing industry.

The cannabis industry

Cannabis is a multibillion-dollar industry in North America. Investors in cannabis real estate can expect a solid return on investment as legalization grows throughout Canada and the United States.

Canada has long been a leader in the cannabis industry. Canadian companies have an advantage over American companies because their distribution is nationwide and not limited to a few regions. They are also able to distribute internationally, which the U.S. government bans American companies from doing. Canadian businesses have full access to capital markets and can access institutional lending and public markets.

Because these companies have access to a lot of capital, they're building large greenhouses and other production sites across Canada. One large cannabis company is currently licensed for 1 million square feet of greenhouse canopy space. Other companies have greenhouse operations in Portugal and Denmark.

While greenhouse permitting is easier than traditional warehouses, licensing for any marijuana operation still requires jumping through more hoops than with other commercial growing operations.

Why invest in greenhouses?

Greenhouses are the most cost-effective places for growing cannabis, meaning investors get a better return on their investment. Because greenhouses are not permanent structures, the permit and construction processes are faster. Greenhouses are cheaper to construct, as they need fewer materials than a warehouse. Prefabricated greenhouse kits make for easy assembly, saving on labour costs.

Greenhouses are optimal for plant growth because instead of using artificial light powered by heat lamps, they feed off the sun—a free resource. Indoor operations require electricity for 12 to 14 hours to power these expensive high-pressure sodium lights. Solar power saves growers 50 to 90 percent in energy costs. Not only is this good for investors' pockets, but it's also good for the environment.

Greenhouses allow for scalability, a great feature for a booming industry. Whereas a warehouse will eventually run out of the room, the greenhouse's modular nature and impermanent design make it easy to expand growing space as the company scales.

Updating greenhouses for cannabis cultivation

While industrial marijuana growth is relatively new, the greenhouse dates back to ancient times. Cannabis companies looking for space to grow will find it easy to retrofit an existing greenhouse to meet their needs. Retrofitting is less expensive and time-consuming than constructing a new greenhouse. It also saves time when seeking new construction permits.

While greenhouses are a less expensive alternative, they still need to be highly technical to meet commercial demands. The right infrastructure will ensure companies produce a quality product while minimizing heating and electricity costs. Automated equipment like conveyor belts and light controls help cut labour costs.

Commercial greenhouses need complex ventilation systems for controlling heat and humidity. These ventilation systems also help deter pests and mitigate airborne diseases and pathogens. In cannabis operations, the ventilation system needs to prevent pollination among the plants, which can cause them to develop incorrectly. Ventilation is crucial to growing a healthy, high-quality product.

Despite having plenty of sun in greenhouses, grow lights are still required. Commercial grow operations need powerful lighting systems. The industry standard is high-pressure sodium lights, but some companies are developing LED lights that claim to perform as well without using as much electricity.

All these costs (and more) face real estate investors who have an eye on established greenhouses.

Cannabis and real estate

Cannabis has carved out its niche within the real estate industry. There are real estate firms dedicated to buying and selling warehouses, greenhouses and farms dedicated to cannabis growth. These firms also sell storefronts for dispensaries. Their specialty comes from helping buyers and sellers navigate the complex laws around commercial marijuana operations.

There are also real estate investment trusts (REITs) dedicated to marijuana real estate. These REITs acquire real estate and growing facilities and then lease them to marijuana harvesting companies. Cash flow and yields have been solid over the last few years. If you're not looking to build or fix-up a greenhouse, you can still use REITs to get into cannabis investing.

Risks when investing in cannabis real estate

Although cannabis is currently a booming industry, experts warn the boom may not last. Some call this the "green rush," comparing it to the California Gold Rush of 1849.

The primary concern is that marijuana is still illegal in most parts of the world. The limited distribution could lead to oversaturating the market. Only two countries currently allow nationwide recreational marijuana use: Canada and Uruguay. Unless laws change, there could be too many growing operations and not enough demand. Breaking into global markets would play a big role in the success of Canadian growers.

The valuation of marijuana companies has been high due to rapid growth, but that may not be sustainable given the distribution limitations. This could mean that investing in real estate for cannabis growth may not be as in demand in a few years.

As laws and attitudes change, what was once illegal 20 years ago is now Canada's fastest-growing industry. Marijuana laws continue to change both nationwide and globally. If you're looking for an alternative real estate investment that's hot right now, greenhouses are an exciting option.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.