From the title it looks like the Colorado cannabis industry is doing well. I this the real story? Is the headline misleading? How is the Colorado Cannabis industry so much better than the newly created Oregon marketplace? What can Oregon tell us about the future industry in Colorado? What does this mean for cannabis real estate?
Is this really good news that Colorado is doing better than Oregon?
What happened since Oregon launched their recreational marketplace? Oregon has been plagued with vast oversupply problems that have caused prices on cannabis to plummet. Colorado on the other hand has “constrained” the supply of marijuana to encourage a more balanced market. In essence, Oregon has taken the free market approach which allowed vast supply, while Colorado has taken a much more hands on approach which has kept prices more stable.
Why is this a problem?
Eventually the free market always wins in economics. Oregon’s recent entrance into the legal cannabis market has shown what true prices of marijuana should be. Colorado has constrained supply to keep prices artificially high. As more states legalize marijuana and supply continues to increase, Oregon’s prices will be the new floor in the market which is 50% lower than Colorado prices today. These prices will continue dropping as supply outstrips demand.
The Colorado marijuana industry will look like Oregon soon
Marijuana is an agricultural commodity that ultimately will be treated like one as more entrants come into the market. Once interstate commerce occurs, it will be impossible for a state to effectively constrain supply to artificially inflate the price as Colorado is currently doing. Oregon will be the new norm with prices dropping precipitously until demand and supply come into better alignment. Colorado will be the new Oregon and the cannabis industry will have some major readjustment.
Marijuana real estate will have problems
In the Denver metro area there are hundreds of buildings that are class C/D buildings that were built out for growing marijuana that will no longer be viable. As prices drop, the overhead (power, rents, etc…) will make these building obsolete. Some marijuana real estate will be okay if it is general purpose that can be tenanted for other purposes, but the rental rates will do down dramatically with a non marijuana tenant.
Colorado will soon follow in Oregon’s footsteps as the industry transitions to the next phase. Many cannabis businesses will not be viable under the new paradigm that is quickly approaching. Real estate owners will be impacted in this shift as well as the above market rents are eliminated and the less desirable properties are mothballed or redeveloped into better uses. Colorado and Oregon have more in common than just high housing costs, Colorado’s marijuana industry will look allot like Oregon’s sooner than many think.
Resources/Additional reading:
https://www.denverpost.com/2018/08/05/oregon-colorado-marijuana-supply/
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Written by Glen Weinberg, COO/ VP 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 the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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