The light is not flashing Green; what is going on with Cannabis real estate?

Denver “legalizes” mushrooms,  more communities become open to Cannabis, corporate America comes knocking, Cannabis real estate quickly goes from green to red.  What is going on?  Why the shift in cannabis real estates fortunes?  What specific property types will be most impacted?  Canada legalized marijuana nationwide and now IL has legalized recreational marijuana.

Corporate America coming

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

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 soon look eerily like the wine industry in the not so distant future.

Commoditization

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.

No longer the “new thing”

Denver has already embarked on the next chapter legalizing magic mushrooms in the last election (note, they can’t actually legalize merely state that they will not prioritize prosecution, this is similar to how the marijuana movement began in Colorado).  . Currently in many towns/cities there are strict laws in place limiting the number and location of Cannabis stores.  This has created “monopolies” for particular stores as competition has been severely limited.  As cities/towns become more comfortable with Cannabis and its impact, more will “liberalize” their policies.   For example, in Steamboat Springs there are currently two dispensaries.  A new proposal will allow many more stores to open in the town in more highly trafficked areas.  As more stores open demand will not increase substantially, the revenue will merely be split over a larger number of players driving down the cost and profitability.  This will hurt many of the existing retail operators.

Real estate woes

As corporate America continues to plow into the Cannabis industry, real estate will be drastically altered. There are three distinct impacts:

1. 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.
2. 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.
3. Retail Operations: Retail operations will be impacted as I see Cannabis evolving like liquor stores where it is a specialty store. But, 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).  Retail will not be impacted as much as grow/manufacturing as I don’t see distribution moving online anytime soon.

Constellation and Coca-Cola are just the beginning of a large transformation in the Cannabis industry.  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.   Manufacturing and Retail should fare better but will still feel the impacts of the industry changes.  If you are investing or own cannabis real estate indoor grows will turn red the quickest while grow and manufacturing will be yellow as they adapt to the changing industry.  What are your thoughts on the Marijuana industry and the impact on real estate?

Resources/ Additional Reading

1. http://fortune.com/2017/10/30/constellation-brands-cannabis-canopy-growth/
2. https://money.cnn.com/2018/09/17/news/companies/coca-cola-cannabis/index.html
3. https://winefolly.com/update/family-gallo-wine-brands/
4. https://www.steamboatpilot.com/news/pot-shops-could-open-in-more-parts-of-town-following-steamboat-council-vote/

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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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