Cannabis was the new goldmine for many years. Unfortunately, the high does not last and is turning more into a hangover. The napa valley of pot is no more. What led to the bust of the Napa valley of pot? Who are the winners and losers in the new paradigm? What is the impact on real estate?
The last six months or so I’ve started getting an influx in calls about sales of retail and grow operations. I could feel a change underfoot. Last week I had two eerily similar calls asking if I knew anyone who wanted to buy retail locations outside a ski town, the seller was willing to walk for basically with what they had in it. Why the sudden change of heart after the industry was touted as the next Gold Rush in the West?
Pueblo, the Napa valley of pot goes up in smoke
When Colorado became one of the first states to legalize recreational marijuana, an enthusiastic county commissioner here said he wanted Pueblo to become the “Napa Valley of cannabis.”
“The streets were going to be paved with gold,” recalled Carole Poysti, who raises goats on her small farm, a decade later Pueblo’s dreams have gone up in smoke. A once-thriving industry of retailers, growers and cannabis-oil extractors—there were more than 200 such businesses in the county in 2017—has collapsed. Only 45 remain, state records indicate. County tax revenue related to cannabis plunged from more than $7.1 million in 2021 to $4.8 million in 2023.rm. “The elementary schools were going to be the greatest in the country.”
Colorado taxes and legislation killed the pot industry
In Pueblo and elsewhere, though, market dynamics have crippled the legal-cannabis industry. Even after legalization, illicit growers and sellers thrived in places like Pueblo, and last year they accounted for about 70% of the U.S. market, according to cannabis-market research company Whitney Economics. Those black-market dealers, unlike licensed ones, face neither taxes nor red tape.
And as more states legalize recreational sales, places like Colorado are no longer so unique. There simply haven’t been enough customers to support all the legal shops. Nationwide, only 27% of legal cannabis businesses are profitable, down from 42% in 2022, according Whitney. The most actively traded fund tracking publicly traded cannabis companies recently hit a record low.
Colorado levies a 15% marijuana sales tax and 15% excise tax on marijuana, and Pueblo County tacks on another 5% excise tax and a 6% sales tax. Cannabis businesses in the city of Pueblo pay an additional 10% excise tax, among the highest in the state.
Higher taxes, Caldwell said, mean higher prices and losing customers to the illicit market. “Every year the state adds more and more rules,” he said. This ultimately is leading to the huge decline in marijuana sales throughout the state.
Corporate America coming for pot
As Canada legalized marijuana nationwide, corporate America has now gotten involved. Two major brands, Constellation the alcohol maker (corona, etc..) and Coca Cola the soda maker have begun investing in the industry along with countless others. Both Constellation and Coca Cola are multibillion-dollar companies that will put substantial dollars towards establishing a “first mover” advantage. This influx of dollars will radically change the “mom/pop” culture of the industry.
Think of what happened to the corner hardware store after Home Depot and Lowes rolled out. Most smaller independent hardware stores have closed. The same will happen in the marijuana industry. If these two companies are making a bet in the space, look for countless others to follow suit as other states and countries legalize Cannabis the draw for corporate America will only increase.
Consolidation in Cannabis
With corporate America now engaged in the Cannabis industry, look for continued consolidation. To survive businesses will either mass produce or become niche players. This is similar to how the wine or craft beer industry has evolved. For example, Gallo winery has almost a 23% market share. The top six wine producers account for almost 60% of all wine sales (wine folly). The cannabis industry will soon look eerily like the wine industry in the not so distant future.
Commoditization of Colorado pot industry
As larger players enter, volumes should increase while at the same time prices will drop. The entrance of corporate America will lead to the commoditization of the Cannabis industry. It is unlikely that Constellation could find enough Marijuana manufactured indoors in a controlled environment to meet their needs. They will scale the business with outdoor grows to inexpensively produce the raw materials for their product. This will force prices into a freefall as the “commoditization” of the product intensifies.
Pot No longer the “new thing” in Colorado and throughout the country
Colorado for many years had a huge demand for Marijuana as most of our adjacent states did not allow Marijuana sales. This led to an influx of demand. Now that spigot has abruptly ended as almost every other adjacent state now has some form of legal marijuana. This has led to an abundance of supply and essentially a race for the bottom.
In 2019 growers could sell marijuana for between $1,800 and $2,300 a pound during the pandemic, but since 2022 the price has dropped to $230 to $500 a pound. The economics of growing don’t work for the industry in Colorado with taxes and regulation.
Marijuana Real estate woes just beginning
As corporate America continues to plow into the Cannabis industry, real estate will be drastically altered. There are three distinct impacts:
- Indoor grows: Indoor grows will not be profitable as prices continue to decline. Many of these growing operations will be mothballed. This is where the largest impacts will be in real estate especially in places like Denver in older buildings that are very hard to convert.
- Manufacturing: The manufacturing of oils/products should do better than the grow side. There will be a continued demand for oils/finished products and the specialized locations/equipment for these processes. You will see consolidation on the manufacturing side as larger players either build their own processing capabilities (like a bottling plant for wine) or buy up smaller players. Look for huge consolidation on the manufacturing side. Furthermore many of the buildings used for grows and manufacturing have low ceilings and are older buildings which will be hard/impossible to retrofit and lease or sell. This will be especially profound for smaller markets like Pueblo that have limited industry/demand to absorb the space.
- Retail Operations: Retail operations will be impacted as I see Cannabis evolving like liquor stores where it is a specialty store. There will be consolidation on the retail side as you will see large chains in many markets (like McDonalds or Wendy’s on the food side). Colorado has made online sales of recreational marijuana legal during the coronavirus pandemic. Now under Colorado’s emergency rules, customers can pay for marijuana online and then pick up their purchase at the store. This will further consolidate the retail side of the industry to larger players. What happens when sales go fully online with some sort of delivery option?
The beginning of the end for Colorado Marijuana real estate.
Pueblo’s collapse as the Napa valley of pot is just beginning. As adjacent states have legalized and can produce at much lower prices with less taxes and regulation, the writing is on the wall. The impacts are already starting to flow through the real estate industry with consolidation. Prices will continue to adapt to the industry changes and heavily impact indoor grows leaving this real estate worth considerably less than today and in some areas it will be basically worthless. Manufacturing and Retail should fare better but will still feel substantial impacts of the industry changes.
As more states legalize Cannabis further pricing pressure will occur driving even more consolidation and commoditization. Colorado real estate is on the front lines of the changes occurring throughout the country in Marijuana and the only way is down for many of the indoor grows and other related operations.
Additional Reading/Resources:
- https://coloradosun.com/2020/04/13/online-marijuana-sales-delivery-colorado-coronavirus/
- http://fortune.com/2017/10/30/constellation-brands-cannabis-canopy-growth/
- https://money.cnn.com/2018/09/17/news/companies/coca-cola-cannabis/index.html
- https://winefolly.com/update/family-gallo-wine-brands/
- https://www.steamboatpilot.com/news/pot-shops-could-open-in-more-parts-of-town-following-steamboat-council-vote/
- https://www.wsj.com/us-news/marijuana-weed-economy-colorado-pueblo-a8b89091?mod=mhp
- https://coloradohardmoney.com/category/marijuana-lending-banking/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. He is the owner of Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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