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Cannabis legalization expected to create robust ancillary market

2019 Forecast Issue: Cannabis

2018 was a big year for cannabis in New Jersey. Short of legalizing the recreational market, which is projected by many to become reality in 2019, the medical program was expanded by nearly 20,000 people and six alternative treatment centers. And for the first time, a bill to create a legal adult use cannabis market made it out of committee and remains in the running toward possible legislation. What’s in store for 2019?

2018 was a big year for cannabis in New Jersey. Short of legalizing the recreational market, which is projected by many to become reality in 2019, the medical program was expanded by nearly 20,000 people and six alternative treatment centers. And for the first time, a bill to create a legal adult use cannabis market made it out of committee and remains in the running toward possible legislation. What’s in store for 2019?

“Timing is definitely the hardest part,” said Kris Krane, founder of 4front Ventures, a multistate cannabis consultant-investor-retailer. A vote, and the possibility of legalization, was pegged for many dates in 2018, and now it is anybody’s guess when a vote will be brought to the floor. One of the reasons, Krane said, is that New Jersey will be one of the first states to legalize through legislation rather than ballot measure.

“It’s always difficult to be the first to do something,” Krane said. “It’s not surprising that it’s taking longer than folks would have liked. It does seem the political will is there to get it done.”

Lee Vartan, cannabis law leader at Chiesa Shahinian & Giantomasi PC, said he believes that legalization could come as early as January, and that the state will be accepting license applications by June.

“2019 is going to be a signature year for New Jersey’s industry, and obviously when you get into 2020 you’re going to see everything explode,” Vartan predicted. “But by the end of 2019, you’ll have the makings of a real industry in New Jersey.”

New Jersey CannaBusiness Association President Scott Rudder and Marijuana Policy Group Co-founder Adam Orens both estimated more conservatively that the real action will take about two years, with Rudder citing “the regulations in place, the applications in place, [and] the laws of physics when it comes to growing the plant and processing.”

But what will prove fertile ground in 2019, many said, will be the ancillary market needed to build both the medical and legal cannabis industries. Lawyers and consultants will be hired to create businesses on paper while contractors will be needed to construct them in brick and mortar.

“Law firms, accounting firms, security companies, marketing companies, designers, equipment manufacturers…there will be a buzz on the ancillary market happening almost immediately and the retail sales will follow,” Rudder said. “Those people don’t have to touch the plants or get a separate license…. Applying your skillset from a traditional industry and bringing it over to the cannabis industry just makes sense for a lot of people.”

A client of Vartan who applied for one of 2018’s six alternative treatment center (ATC) licenses attended job fairs in the community in order to connect with local residents and businesses. Although that client did not get the license, the community focus is indicative of the importance of the cannabis ancillary business market.

“It’s not only a matter of working for the ATC, it’s a matter of working for an HVAC company or electrical company or a cleaning company,” Vartan said. “HVAC is the best example – there are operations in Colorado that are HVAC companies specializing in indoor grow facilities. If you see a lot of licenses issued in 2019, you’ll see an uptick, same with professional work like lawyers and consultants. All of that is part of the growth of the industry.”

According to Rudder, the ancillary business in Colorado raked in $1.3 billion last year on top of the $1.5 billion in plant sales. Colorado has roughly 60 percent of the people New Jersey has, and is much further from other metropolitan areas. He estimates that a fully realized industry here, taking both direct and ancillary cannabis businesses into account, should generate between $3 billion and $5 billion after a couple of years.

How much revenue is produced in 2019 depends on how quickly legislation is passed, a regulatory body is created, licenses are issued, and businesses mobilize. The current market is vertically integrated, with a license covering cultivation, production and retail. If new laws allow for separate licensing, Vartan said he believes more retail licenses will be issued than any other because that portion of the application process has been the easiest for his clients to navigate.

Regarding product offerings, Krane and Orens both believe that vape cartridges will continue to become more popular as they allow users a discretion—they barely smell, and are small and portable—that smoking flower does not.

“Flower cannabis is the largest [nationally] by market share,” Orens said. “It started at about 65- to 60 percent market share, but that’s dropped to about 55 percent. Concentrates, which includes vaporizer cartridges but also extracted products like oil and shatter and wax, started at about 15 percent of the market and have gone to 30- to 35 percent.”

Depending on what’s allowed by the new regulations, cannabis-infused drinks may also make their way onto the New Jersey scene, and edibles will increase in popularity. Krane also highlighted a trend coming up on other legal green states toward micro-dose edible products, between 2 mg and 5 mg rather than a more traditional 10 mg dose.

As the medical market continues to flourish with changes Gov. Phil Murphy implemented in 2018, the growth and impact of the adult use market in 2019 depends largely on the framework of legislation yet to be passed.

Once the legislation passes, the next year is spent with the regulatory commission filling in the details to all its rules, Orens said.

Gabrielle Saulsbery
Albany, N.Y. native Gabrielle Saulsbery is a staff writer for NJBIZ and the newest thing in New Jersey. You can contact her at gsaulsbery@njbiz.com.

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