2017: The year pot’s Rocky Mountain high ends
As marijuana becomes more mainstream, Colorado is at a tipping point
Would you rather buy marijuana where the “cool marine air blankets the Mendocino coast to give the lush marijuana plants a fresh taste,” or from “the concrete jungle of downtown Denver that was a former steel building filled with glimmering artificial lights and fed by the Denver municipal water supply with a hint of antibiotics”?
Which choice will the consumer make?
There will be far ranging impacts to the marijuana industry as more states come online, such as California. And though we had a first mover advantage, Colorado will no longer be the major player in the industry.
I’ve said for many years that marijuana will end up like the wine or beer business, in which you have various price points based on consumers’ needs and preferences.
For example, California, with marijuana now legal, is setting up an “appellations” system, similar to wine growing regions like Champagne or Bordeaux. Just like wine, there will be large-scale volume producers and many niche players. As I’m sure everyone knows, there are no producers that grow grapes indoors for wine!
Why will Colorado have a tipping point?
There are three primary reasons Colorado will face head winds in the marijuana industry.
- One of many and basic supply and demand: As more states come online, the supply of marijuana will increase exponentially. Not only will there be more marijuana, many of these states like California have plans for outdoor growing, which will allow even more supply. Supply will increase exponentially; while simultaneous the demand for Colorado marijuana should decrease. Whether legal or not, Colorado was a supplier for many states. Recently a bust in Denver resulted from marijuana being exported to Nebraska. Supply from other states will no doubt spread with new states legalizing recreational marijuana.
- Prices will decline while quality improves: Marijuana prices declined more than 30 percent last year and this trend seems likely to continue. The marijuana industry is sure to evolve, much like the wine industry. For instance, almost 75 percent of all wine consumed is less than $15 per bottle, with 31 percent roughly $10 a bottle. Of the top 20 wines, the top 5 are less than $6 a bottle. This means large producers own the lion’s share of the market. Just as in wine making, the best grapes and wines are from certain temperate regions. This same theory holds true for marijuana. There is no way, from a price standpoint, a grower in a Denver warehouse can compete. For example, the Denver warehouse has substantial electricity, gas, water, ventilation, build-out, tons of overhead and hard costs. On the other hand, an outdoor grow basically puts the plant in the ground with little fixed overhead. Unfortunately, most of Colorado is a semi-arid state, which is not ideal for the damp conditions that marijuana prefers. Therefore, I contend that the same trends we see in the wine industry will play out in the marijuana industry as the sector matures and consolidates
- Push for federal regulation, which would allow interstate commerce: The major hurdle holding the marijuana industry back is the conflict of state and federal laws. Though President Donald Trump has recently made his opposition to the marijuana industry public, I don’t foresee a rollback of state laws. Recently, the congressional cannabis caucus was formed with both Democrats and Republicans to pursue federal regulation and end the conflict of state and federal laws.
The million-dollar question is:
With the number of states (28 at last count) with some form of marijuana legalization (medical or recreational), the tide had turned toward favoring an update in marijuana laws.
Who will be impacted most?
Indoor growers in larger metro areas will be most affected since their price structure is higher. As the race to the bottom price continues, it will be increasingly difficult to maintain the margins to be profitable.
Are there particular real-estate impacts?
During the last five years, as the industrial market has gotten tighter, more growers focused on class C/D industrial properties that were not functional for other uses. Many went into older assembly and light manufacturing facilities with low ceilings, difficult access (no dock doors), and other issues that rendered them basically useless for other uses today. These buildings are going to be difficult, if not impossible to match with tenants as the marijuana industry changes. If a grow facility is in a functional building with 16-plus foot ceilings in a good location, these buildings will be fine for other uses, although the majority of improvements will be totally worthless. It is unlikely another user needs small windowless, climate-controlled rooms with enough power for a dry cleaning operation.
What should you do if you are in the industry?
From a real estate perspective, if you are looking at property, make sure it is very generic and could easily be transitioned to another use.
Stay away from special purpose/dysfunctional properties that would be less than desirable for another use.
What areas might still thrive?
Retail and manufactured products are not going away, nor are all the ancillary services for the industry (software, compliance, etc.) These are areas where Colorado companies are ahead of the rest of the industry and will continue to thrive.
As marijuana becomes more mainstream, consumers are driving the changes this year. Just as grapes for wine are not grown indoors, marijuana will also be grown using conventional agricultural methods. These changes will be fostered by consumer preferences (price, quality, etc..).
The consumer ultimately will end the Rocky Mountain high we have been on over the last 10 years or so.