Cannabis was the new goldmine for many years. I always am entertained by the chart…
President Donald Trump has reportedly lent his support to Cory Gardner, a U.S. senator from Colorado, promising to back legislation that “protects states’ rights” on legalized marijuana. The president’s decision would represent a split from U.S. Attorney General Jeff Sessions, who in January rescinded an Obama-era policy, known as “the Cole memo,” that gave states more leeway over the federal government on marijuana policy.
The cannabis industry rejoices the announcement but is this really a big deal? How is the industry getting decimated?
Nothing has changed!
Hold the champagne toasts! Trump’s statement has not changed anything. Cannabis is still not legal under federal law. Trump’s memo merely stated what is already occurring in the various states which is business as usual. Since cannabis is still considered a controlled substance banking and capital is still limited. Trump’s statement does nothing to solve the legalization issue at the federal level
The Marijuana problem: A bigger issue “decimates” the industry
In the cannabis industry there is considerable “noise” on both side of the debate. Once you factor out the noise the bigger issue becomes apparent. The real issue is basic economics. Supply and demand are out of sync. According to Marijuana Business Daily , Oregon’s cannabis market is decimated due to the annualized price drops of over 50% the last two years. This is not unique to Oregon. Colorado’s wholesale prices have been dropping precipitously as well. As a result, half of the current business owners will be out of business as prices continue to drop before stabilizing.
Economics always wins
It is important to remember that cannabis is an agricultural commodity that can be grown easily. Watch what is happening to hemp; “From a botanist’s point of view, it’s (Hemp) the same genus and species as marijuana,” said Duane Sinning, the director of planned industries for the Colorado Department of Agriculture. “The difference is the chemical make-up inside the plant.” (the Denver Channel). Hemp has grown from 1400 acres in 2014 to over 17,000 acres in 2017. If hemp can be expanded this quickly in a semi-arid state like Colorado, imagine what happens when Cannabis is eventually treated like the agricultural product it is. You guessed it supply will balloon and prices will free fall until finally stabilizing at a point well below where they are now.
Substantial money has been put into Cannabis real estate. When the industry first began, the only places people grew legally were in commercial buildings primarily in cities that passed laws to allow the grows. For example, Denver became a leading area for growing in Colorado and remains one of the primary producers of cannabis for the state.
To grow indoors producers spent millions retrofitting commercial buildings to handle the demands of growing plants in a warehouse. For example, lighting had to be provided, water, ventilation, precision heating and cooling, etc… All these upgrades were expensive to build. Furthermore, the costs to operate these facilities is high due to rents in metro areas, electricity, water, higher taxes, etc… All these expenses must be passed on to the buyers of the cannabis.
As prices dropped, and cannabis became more accepted in many areas growing began to transition from industrial buildings in the city core to greenhouses and outdoor grows in more rural areas. For example, in Colorado, many producers have migrated a few hours south of the Denver metro to areas like Pueblo that have more temperate weather for greenhouse growing, cheap land, and low property taxes
Indoor grows in metro areas don’t work due to costs
With prices dropping so rapidly due to excess supply, the majority of indoor grows in Denver and other metropolitan areas will no longer be viable. A producer can’t pay rent of 30/ft when they can grow outside of a metro area for considerably less.
As prices continue to drop cannabis real estate will be severely impacted. As mentioned in prior articles not all cannabis real estate is created equal ( See 3 tips to value Marijuana Real estate ) . General purpose real estate will be okay but worth substantially less than today. A general purpose tenant will not be able to pay 30/ft to lease a space, they might be able to pay half that amount which will translate into lower rents and lower building values.
The real pain will be felt in special purpose class C/D properties with low ceiling heights. These buildings will be difficult to repurpose and might be valued just for the land value depending on the area. Someone is going to take a haircut on these properties from the borrowers to the lenders.
The transition begins:
Just like the gold rush, the first movers did well; each subsequent miner did a little worse than the previous miners until there was a “correction”. Many got out of mining and over time this brought supply in line with demand. The cannabis industry is beginning the “correction” phase today. The pain is just starting and will get considerably worse. There will be far reaching impacts throughout the industry including real estate. Just like in the gold rush, the strongest players (most well capitalized) survived while many others did not make it through the economic correction. Are you ready for the bust of the American Cannabis rush?
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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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