With ships piling up at ports and the national supply chain strained by the continuing pandemic, the cannabis industry found itself in the same situation as other businesses: waiting for the raw materials needed to build the production facilities and dispensaries to meet the rapidly growing demand in new markets all across the country.
“We’re currently building a new distribution facility and we’re on a three-week delay at the moment for PVC piping for the plumbers. And that’s after already having an initial delay,” said Simon Nankervis, CEO of The Source, a vertically integrated company currently expanding in Nevada. “We’ve seen a significant increase in both the cost and the lead times.”
And it’s not just PVC.
“I don’t think there’s a thing in our business that has not seen a significant increase in lead times,” Nankervis said. “The best example I can give you, and it’s a very simple one: Just for electrical cabling, our cost has increased 30%.”
In New England, Theory Wellness has been continuing its expansion, though it’s costing more and not always ending up exactly as initially planned. CEO Brandon Pollock said the higher costs have been the biggest negative, “but there’s been a lot of weird, little things.”
For example, you might order some lighting that is designed by your architect to fit your dispensary, “and all of sudden those lights don’t exist anymore,” he said, “and no one knows if you can ever get them again, so you have to switch at the last minute.”
But in the fast-paced, high-stakes world of cannabis, there’s no time to worry about additional costs in the push to get new stores open.
“Despite the increasing costs, what the investment community has said is ‘This is a go … and if it costs us a few more bucks, we want to be in the market earlier rather than later,’” said architect Brian Anderson, co-founder of Anderson Porter Design, a cannabis industry design firm.
And for the construction businesses themselves, everything has turned into a juggling act as lead times and costs spiral out of control and the supply chain works to catch up with ever-increasing demand in an industry in which every day matters.
A shift toward sustainability
While delay and cost issues stemming from the pandemic and supply chain crisis may be costing owners and operators some additional green, they may inadvertently be helping make the industry itself more green.
According to Eamonn O’Kane, CEO of Valiant Construction, one of the unexpected byproducts of the pandemic supply chain issues has been an increase in the use of environmentally friendly and sustainable products in their buildings. Before the pandemic, O’Kane says, many of those options were not cost effective for clients, but increases in standard building materials have helped “level the playing field.”
“We’re using a lot more sustainable products than we did before COVID,” he said. “It was just the cost. There was a barrier of entry for them.”
In addition, shipping costs and delays are often reduced because so many of the more environmentally friendly products are manufactured in the United States. O’Kane said the company’s need to “think outside the box” for clients led to discussions with architects and the discovery that costs were no longer prohibitive, which he called “an absolute shocker.”
“They used to be super expensive and usually priced themselves out of the market because of the inherent cost, but now with the cost of everything else coming up, some of them are very competitive,” he said.
— Brian Beckley
“Unfortunately, we’re on a timeline where we can’t say it’s going to be built in six months because of the supply chain,” said Eamonn O’Kane, CEO of Valiant Construction. “It’s a global thing. And that’s not to minimize the actual increase of cost in material. Most of it has gone up 30%, some of it has gone up 80%.”
Price jumps and delays
Founded 12 years ago in Ireland, Valiant Construction has been focused on the U.S. cannabis industry for about a decade. Business is booming and in spite of the pandemic, O’Kane said the company is “busier now than we’ve ever been.”
But that, in itself, is something of a problem.
“The demand has been very high. It’s only intensified,” said Valiant co-founder and president Niall McManus. “There’s more work out there now, but materials are slowly coming in.”
Customers are even willing to pay a premium to stay on schedule, but sometimes even that’s not enough. McManus said lead times and costs are up on just about everything. For example, pre-COVID, getting switchgear for the electrical system would take about 16 weeks. By last fall, that had jumped by almost 50% and even those estimates were shaky at best.
“You could be waiting 20 to 24 weeks, and on the 22nd week they can call you and say, ‘We’re still waiting on a part of that switchgear and it’s going to be another five to six weeks,’” he said. “And that’s across the board on anything mechanical.”
O’Kane said it is affecting every project Valiant is working on, with materials costs up by as much as 80% in some categories.
He cited rebar and mesh, basic construction items, as jumping from $7 to $37 each and said the price of plywood has gone “through the roof,” not because of the wood, but the glue used in making the board is sourced from factories abroad that were hit hard by the pandemic and then stuck in the supply chain backlog.
It’s an all-too familiar story for many CEOs working to get new stores open on budget.
“We’ve seen a significant increase in the cost of raw materials,” Nankervis said. “Things like steel, timber, carpet; things as basic as glue for our walls and glue for our carpets.”
O’Kane said one project Valiant was working on used a prefabricated steel building that in December 2019 was budgeted at $480,000. But the client had financial issues, forcing a postponement of six months. By the time they checked the price again, in summer of 2020, it had jumped to $860,000 for the same building.
“Obviously it causes friction with clients,” McManus said.
O’Kane said Valiant is fortunate to have built strong relationships with suppliers, but the ever-shifting supply chain has meant a change in what it can promise clients as far as price.
“As of right now we’re only locking our price in for 10 days, where it used to be good for 30 days,” he said, citing copper wire in particular, the cost of which can change up to 20% overnight now.
Nankervis said he has seen the same thing from the client side, noting that contracts used to have a provision tying costs to within 10% of the original estimate.
“We cannot get a general contractor today to sign that provision into any agreement,” he said. “They say whatever the market price is, that’s what you’re going to have to pay.”
‘A radical shift’
Anderson, whose architectural firm works entirely in cannabis and has designed more than 3 million square feet of space for licensees, said most projects today are starting up to two months late, a significant wait on something scheduled to take 10 months to build. He noted that a delay of just one week on any item can send ripple effects through the entire schedule.
He also said the cannabis industry, though growing by leaps and bounds, still pales in size to traditional industries and does not have the purchasing power of, say, a soft drink manufacturer building a new bottling plant, which can outbid cannabis operators for experienced, connected contractors and limited supplies.
In total, Anderson estimated that costs on building or renovating a cannabis cultivation or manufacturing facility have undergone a “radical shift” from a standard of about $250 per square foot to as high as $375.
To help meet the challenges, Valiant has changed the way it lays out projects, working closer with architects and suppliers to create a multi-phase approach, even in smaller projects, and keep the build moving forward while waiting on long lead time items. But it takes extra planning.
“You have to be able to think about what materials you need to be ordering four to five months in advance to ensure you are going to have them in the right time,” said Christopher Tenaglia, Valiant’s chief operating officer.
Anderson said in some cases that means orders are being placed before all the permits are secured, just so equipment will be available when it’s needed.
“We’ve got projects today where we’re placing orders for the HVAC equipment before concrete has been poured,” Anderson said, noting that some of his Massachusetts clients are committing up to $2 million for systems even before meeting the state’s dual licensing requirement. “The ownership is sitting there saying, ‘If I don’t place my order for $2 million worth of mechanical equipment now, I can’t even open when I’m supposed to open.’”
“We’ve bit the bullet and made compromises where we had to and paid more where we had to stay on track because for us it’s just really important to get open to market,” said Pollock, who was working to complete and open new Theory Wellness stores in multiple states.
Years to recover
Although the contractors and CEOs said they expected prices to drop and lead times to eventually stabilize, no one expects it to go back to pre-pandemic levels.
“We’re assuming this is the new normal,” Nankervis said. “So we’re running our business according to the lead times we’re seeing today until we see something that said it’s changed.”
One panel supplier told Valiant that he was so far behind he could not take orders for two years, forcing the company to make sure they have “backups on backups on backups” for everything, O’Kane said. But the continued investment in cannabis facilities means even more demand in the future, especially as states like New Jersey and New York come online.
Anderson agreed, noting that “institutional investment” in the industry was just starting to creep in.
“That’s a demand that is going to put a strain on supply for the for the foreseeable future,” he said.
“We understand it because we’re living through it,” O’Kane said. “The supply chain, in all honesty, I think it’s going to take years to recover.”