On today’s show we’re talking about the fallout from the gold rush in Cannabis. As more and more states and countries have decriminalized marijuana, investors have rushed into the market to plant acreage, build greenhouses, and create indoor manufacturing using vertical hydroponics. All of this was in anticipation of an increase in demand.

To be clear, in states like Colorado, Washington, and California, we have seen an increase in demand. I have to say, even though it’s been legal for a while, it is still a bit jarring to me to be walking down the streets in Manhattan and smell marijuana. I’m not a user, and this podcast isn’t intended to speak to the merits of cannabis use. I’m merely covering it from a real estate perspective.

California’s legalization of cannabis for adult recreational use was expected to be massive. Back in 2016, industry investors claimed sales could top $6.5 billion by 2020.

And by the end of 2019, California is indeed home to the world’s largest cannabis market, totaling close to $12 billion in estimated sales. But here’s the problem: $8.7 billion of that is changing hands in the underground market, leaving only about $3B coming through licensed channels.

It seems that prices for growers have been falling significantly and many businesses are laying off staff.

CannaCraft recently laid off 20% of its 240-person workforce.

Smiths Falls Ontario based Canopy Growth is one of Canada’s largest indoor grow operation and occupies the site of the old Hershey Chocolate Factory. They are orchestrating a massive overhaul involving a layoff of 500 workers, and a writedown of $700 – $800 million dollars, the closure of two greenhouses and the cancellation of plans to operate a third. The two greenhouses based in British Columbia were opened in February 2018 and represent about 3 million square feet of greenhouse space.

The company, has struggled to create free cash flow as the cannabis market did not mature as fast as it anticipated and federal regulations permitting outdoor cultivation were introduced long after Canopy had begun investing in their greenhouses. Constellation Brands is a major share holder in Canopy having invested about $5B for a 38% share of the company.

Canopy now operates an outdoor production site that’s made cultivation more cost-effective. It believes that site will play an important role in meeting demand for products necessitating cannabis extracts.

Over the past 4-5 years, farmland throughout several states and provinces was sold at top dollar in anticipation of the growth of the cannabis industry. Many of these investments are being written down as the money has failed to materialize.

The industry has struggled to grow because the opening of legal retail outlets is very tightly regulated. The number of retail licenses issued has not kept pace with the increase in supply at the production level. Getting the product to market doesn’t work if the retail channel hasn’t been developed. This too has been a major impediment to the industry growth.

Like many new markets that are still developing, it’s sometimes hard to anticipate where the inefficiency is going to appear in the market.

A quick survey of licensed farm land for sale, shows that prices for licensed land have been falling as oversupply has hit the market.

Let’s be clear, there is still big money making investments in Cannabis. AB Inbeve, the world’s largest beer company recently made a $50M investment in Tilray to research infused beverages.

Constellation Brands is also betting big on the infused beverage market. While beverages are still a growing segment of the market, the volumes are low. This segment is expected to represent about $5B in revenue annually by 2026.