It’s an exciting time to be in cannabis production, with sector growth rising and accelerating year after year. But the bigger your operation, the bigger your upfront costs, and investing in a large-scale operation with a host of specific, highly regulated requirements for resources, security, and other considerations involves a series of risky decisions. With barely a quarter of industry participants being able to eke out a profit in 2023 – a massive drop from 42% just one year prior – the stakes are higher than ever. And markets as competitive as this one don’t go easy on those who make mistakes.
The J2H team has worked on numerous cannabis cultivation projects across the U.S., giving us a wide range of state-by-state expertise and a stack of lessons learned from the field. Here, we’re zeroing in on three of our most important takeaways based on our work with cannabis grow facilities.
1. Figure out how big you need to be.
One of the very first considerations of any cannabis cultivation facility involves deciding the scale of the operation. How big – or small – of an operation you decide to take on informs everything from location and facility type to layout and equipment selections. Some options are suitable only for smaller operations, while others only make sense when growing at a larger scale. Decisions related to the scale of the cultivation facility are often rooted in how much capital you have available and what local regulations do and don’t permit.
In general, the larger the space, the bigger the investment typically is. But, as the cannabis sector grows more competitive, larger operations are better positioned to box out smaller competitors. This, in part, explains why the average domestic cannabis grow facility nearly doubled in size between 2016 and 2020. From what we’ve observed through our work, the most successful cultivators are the ones who keep an eye on the horizon and plan ahead. If current regulations only allow for medical use of cannabis, that caps the market at a certain size. But medical use is frequently a legislative precursor for recreational use being permitted down the line.
"Growing clients are often surprised when we tell them that it’s cheaper to build more space than you need in the long run. Even if you’re not using all of it, securing that square footage ahead of time pays off in a big way when it’s time to expand your cannabis operations.” John Sadlik, J2H Partners
Growers who plan for smaller facilities based solely on current market realities may face themselves scrambling to expand their footprint later on. For this reason, we frequently advise our clients to right-size the operations for today but keep the flexibility required to easily expand their growing operations tomorrow. One of the simplest examples of this is building for single-tier growing, with the option of seamlessly adding a second tier later on. The key element to remember here is that although you want to plan for backup square footage, you should only fully outfit it once necessary. Growing technology changes rapidly, so investing in equipment and other operational materials in advance is almost always a waste of capital. Wait until you need it.
The size of the space also plays a factor in profitability. Growing facilities need to consider plant density – adhering to the ideal ratio, though tricky, is important to get the best possible yield.
For facilities of 20,000 square feet and under, a 50-60% canopy-per-square foot ratio is ideal. Those utilizing less than 50% of the facility for flower operation may struggle with profitability. Filling more than 60% with flower, however, could make ancillary operations feel squeezed.
2. Make careful selections when outfitting the space.
Like any year-round agricultural facility, cannabis growers must control the environment within the facility – temperature, light, humidity – and the necessary equipment for the job, mitigating pests and disease, and adhering to the necessary regulatory compliance for consumable products. Ventilation and other factors are also important for the health of the crop and staff alike. Some facilities choose to add supplemental CO2 through HVAC systems in order to promote healthy plant growth, but that same CO2 needs to be properly managed and ventilated in order to avoid harming staff.
Environmental control equipment can be selected based on their ability to customize and adapt. Some of today’s more innovative facilities use a hybrid approach to indoor/outdoor cultivation by using features such as retractable roofs in order to tap into sun and rain when it’s available, retracting back into a fully indoor facility when it’s not.
Indoor cannabis cultivation setups typically consist of at least four distinct types of grow rooms, each housing different flower types with various stages of plant growth, from infancy to maturity. Each room has unique environmental conditions, grow light types, and schedules.
Cannabis growth facilities also share similarities with mission-critical facilities, such as data centers. Mission-critical facilities require additional layers of preparation to operate, including stricter security requirements related to access and surveillance and highly precise environmental controls.
3. Run the numbers to determine the right balance of sustainability and profitability.
Sustainability is certainly a buzzword in many industries, but that doesn’t mean it should necessarily be a major strategic focus for all cannabis growers. In some cases, investments in the most sustainable technologies and operations can be cost-prohibitive. Water usage, however, is a core cost center for growers, as is managing the temperature and other aspects of the environment for the crop. For example, the lighting required for indoor growing inherently gives off heat. That additional heat needs to be vented out of the facility. At J2H, we’ve worked with clients to find creative solutions to manage this residual heat, such as separating ballasts from their light fixtures. By decoupling them and putting them into separate spaces, we can minimize the amount of additional heat generated by the lights, creating substantial efficiencies that keep HVAC units working at their best.
New developments and ideas such as this can be likened to other examples – ten years ago, for example, LED lights used for growing crops were considered a dubious choice. Over time, however, they’ve become an industry standard for indoor agriculture.
Although sustainability might not need to be a core consideration for all cannabis business operators, it is worth considering as you plan your business, for two reasons.
1: Ensuring efficiencies as the costs of utilities fluctuate and the business becomes more competitive/resource intensive, thus future-proofing the business, and
2: Because it could be a compelling factor to your investors and/or customers.
As the industry grows and evolves, new considerations and challenges for cannabis grow facilities continue to emerge. Technological developments will affect several factors in the future, such as lighting, environmental controls, and security, which will mean that owners of growing facilities will have to periodically reinvest in new equipment. But this will make for greater efficiencies and better ROI per square foot – developments and advancements such as vertical farming, less water and energy-intensive equipment, and automated processes will likely deliver operational savings that will make the up-front investment well worth it. Likewise, regulations may change over time, and facilities must be prepared for the possibility of mandated upgrades to security and other features as this nascent industry continues to develop and mature.
The fire is hot for businesses in the cannabis space. What may have felt like a gold rush a few years ago, with plenty of opportunities for everyone, is now a crowded and cutthroat competition that not everyone will survive. Some data suggests that half of businesses in the cannabis space will fail within five years, and as many as 70% of them will shut within ten.
Working with an owner’s rep is a critical step that can make or break a cultivation facility. The presence of an owner’s rep establishes stronger credibility in the eyes of lenders, partners, and other investors. It also helps save costs and manage bureaucracy and an endless stream of decisions that need to be made. Ultimately, cannabis projects that are guided by an experienced owner’s rep, such as J2H, are more likely to be fully operational on time and under budget. In an environment where every advantage matters, having the right kind of help by your side might just be the most valuable tool you have.
Let’s talk more about your next cannabis project. The team at J2H is here to help in whatever way we can – contact us to get started, or read more about our insights and learnings in our newly published white paper.