Aspen Forest is more than a small operator of two indoor cannabis cultivation farms and a dispensary that was put on the market this year as sales fell. It’s the latest sign that increased legalization of marijuana isn’t creating the demand the commercial real estate industry was banking on, leading some owners to rethink their holdings and even put property up for sale.
The owner of Aspen Forest, publicly traded Israeli company Vonetize, said it’s pursuing the operator's sale after the Colorado cannabis market began to weaken in 2021 as increased competition in nearby states “significantly decreased” Aspen Forest’s sales. That led to a “dramatic decrease in selling prices,” according to a translated Vonetize regulatory filing in Hebrew.
While Vonetize has a deal pending, it still needs to win approval from state and local regulators. Meanwhile the company, at 3899 Quentin St., is financially unviable, Vontetize CEO Gabriel Barzani said in the filing.
Across the country, the cannabis industry is facing a downturn in sales that has resulted in missed rent payments and cultivation facilities shutting down.
That’s a far cry from the start of this year, when retailers such as Curaleaf Holdings, among the largest players in the industry with more than 136 dispensaries and 26 cultivation sites in 22 states, and The Scotts Miracle-Gro Company, owner of cannabis-growing equipment supplier Hawthorne Gardening, hoped for a resurgence after a soft fourth quarter.
The reason for the optimism at the start of the year? New markets and more consumer interest in existing markets spelled the potential for gains, according to a report from cannabis data company BDSA.
However, “with the first quarter fully in the books, it’s clear that these hopes did not always materialize,” BDSA said in the report, released last month. The firm’s retail sales tracking shows that while there was growth in emerging markets, total sales declined in the first few months of 2022.
For Curaleaf, the deteriorating financial picture continued through the first half of the year. The company reported nearly $50 million in losses from January through June versus losses of $22 million for the same time last year. Revenue had grown about 8% in the second quarter, but mainly through new store openings.
Property Deal Fallout
“There is certainly a slowdown in demand for California industrial cannabis properties,” Ellis said in an email to CoStar News. “Many operators are trimming the fat and selling off nonperforming assets and or assets in development. We are seeing fewer top dollar buyers and more buyers looking for distress sales.”
This week, publicly traded MedMen announced the sale of its Florida assets including licenses, inventories, dispensaries and cultivation facilities for $60 million. CEO Ed Record said in a statement the company was exploring the sale of its New York cultivation facility and dispensaries.
In other cases, cannabis operators are looking at raising cash by unlocking equity in their owned property through sale-leaseback transactions, Ellis said.
Buildings that were once in demand for cannabis applications appear to be selling for other uses including warehouse distribution, she added.
BDSA found the most dramatic sales decreases in the most established markets it tracks. Across California, Colorado, Nevada and Oregon, total dollar sales fell about 10% in the first quarter mainly due to the decline in retail prices, according to the firm.
The falloff is particularly notable in Colorado. Tax revenue from marijuana sales in the state totaled $21.34 million in June 2021 and was down to $17.44 million in June this year, the latest figure reported by Colorado’s Department of Revenue. That is an 18% decline.
The median price for 1 pound of marijuana buds sold for $709 in July, according to the department. That is a 50% decline from the price of $1,309 per pound a year ago.
Businesses Shutting Down
Analysts have predicted cannabis-related businesses will be a booming business nationally, with more states legalizing the recreational use of cannabis by adults in the past few years, including New York and New Jersey.
But state and local regulators in some cases are taking a long time to draft rules related to cannabis and cannabidiol, or CBD, which is featured in products that are hemp-derived but without tetrahydrocannabinol, or THC, the substance in marijuana that gets users high.
And when rules are finally set, they can be very restrictive in where cannabis and CBD sites can operate, mandating buffer zones between them and schools and churches.
Diminishing sales could add to the complexity of financing the cannabis industry, which already faces laws at the local, state and federal levels.
In addition, property utilized for growing or selling cannabis is still technically subject to forfeiture to the U.S. government through the Controlled Substances Act.
Authorities, however, have not been enforcing the act in jurisdictions where cannabis sales have been declared legal.
‘Tough Business’
The Marysville, Ohio-based company reported this month that second-quarter sales declined by 26%.
“Cannabis prices remain significantly lower due to excess inventory produced by cultivators,” Hagedorn said on his earnings conference call. “As the challenges continue, it is increasingly clear the role public policy has played in fueling the problem. Some states licensed far greater levels of cannabis production than their citizens could consume. The combination of loose regulation and limited enforcement has fueled the illicit market and created a hurdle the legal market is struggling to overcome.”
Hagedorn added that the cannabis industry is clearly in reset mode right now “with some cultivators simply walking away because of the tough business climate. While new East Coast markets continue to grow, it is not enough to offset the declines in the established ones.”
Publicly traded Power REIT, which owns cannabis cultivation greenhouses, reported this month that it has been renegotiating leases with its growers facing a down market.
“Wholesale cannabis prices nationwide have compressed with Colorado among the most severe,” David Lesser, chairman and CEO of Power REIT, said in a statement. “We are working with our tenants to get through this period of excess supply and have executed a number of lease amendments to support their viability in this market climate. “
Wholesale prices are below the cost of production, especially for indoor warehouse-style cultivation facilities, he said.
“We are seeing cultivation facilities shutting down and fire-selling product, which is further driving down prices,” Lesser added.
Innovative Industrial Properties, owner of 110 cultivation facilities, reported this summer that its fifth-largest tenant, Kings Garden, failed to make rent payments totaling $2.2 million on all six of its properties.
Despite the current troubles, Ben Kovler, chairman and CEO of Chicago-based Green Thumb Industries, reported this month that he still sees some upside, especially on the East Coast. Green Thumb is a national cannabis consumer packaged goods company and retailer.
“While the market will continue to fluctuate, based on various economic factors, it doesn’t change the fact that cannabis is a growth industry with strong demand tailwinds,” Kovler said on his earnings call. “As we sit here today, the cannabis market is at a run rate north of $26 billion. The transition to adult use in key markets presents massive growth potential. We have had the opportunity to watch that movie in real time this quarter in New Jersey, with Rhode Island and Connecticut coming later this year.”