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Smoked Out: Denver’s Marijuana Retailers And Wholesalers Cope With Changing Industry

As Denver’s marijuana market continues to shift, industry retailers and wholesalers seem to be heading in opposite directions when it comes to their commercial real estate strategies.

More than $139.6M of both medical and recreational marijuana was sold in Colorado in March, a more than 14% decline year-over-year, according to the Colorado Department of Revenue. Marijuana sales in Denver County dipped equally and totaled just $30M in March. These sales figures have declined consistently since around mid-2020 and are one reason why Colorado has seen more than 10,000 marijuana industry jobs disappear over the last year, according to a recent Vangst Jobs Report.

The Joint by Cannabis Dispensary on 38th Avenue in Denver

Amid the uncertain sales environment, some marijuana wholesalers have decided to pack up and leave Denver’s industrial market behind in search of better opportunities elsewhere. On the other side, brokers say demand for well-located retail marijuana spaces in urban areas has never been higher.

“Retail is strong in Colorado and these spaces typically get backfilled within six months,” Rick Egitto, a principal of Avison Young’s capital markets group in Denver, told Bisnow in an email. 

One reason why retail marijuana spaces are in such high demand is because of their potential to generate cash flow, Egitto added. For dispensaries and other retail stores in markets like Denver, the potential to generate cash flow could help maintain cap rates for commercial owners. 

Egitto pointed to a dispensary location for The Joint by Cannabis on West 38th Avenue in Denver as an example of the high demand retail spaces are seeing. The property was listed on the market in November 2022 and had a potential 1031 exchange buyer lined up in May 2023. That deal fell through, but just days later, Egitto said he toured the property with another investor who ended up purchasing the property. 

“Cash flow is king in today’s investor world, and like the rest of the NNN leased retail properties out there, these are perfect for all-cash buyers seeking cash flow,” Egitto said. 

Despite the bright spots that Denver’s marijuana retail market offers, there are still a couple of dark clouds that may scare off future investors. For example, 19 states and the District of Columbia have decriminalized recreational marijuana use by adults aged 21 and up since Colorado did the same in 2014. This has significantly decreased marijuana tourism in Colorado, a key driver of the state’s sales, Doug Ressler, a business intelligence analyst at Yardi, told Bisnow

At the same time, Ressler said investors are wary of deploying capital into the marijuana market because the plant is still federally illegal. This federal status also prevents them from getting a loan from a bank and virtually guarantees that any investment will have to come from private equity, which has slowed down significantly because of inflationary pressures. 

“That lack of spending has forced some grow facilities and distribution locations to consolidate or close,” Ressler said, adding that he expects to see some distribution site mergers because of the recent market downturn. 

Meanwhile, Denver’s industrial market continues to show signs of resilience despite ongoing inflation and high interest rates. Avison Young’s Q1 industrial report shows that Denver’s triple-net rental rate for Class-A properties increased to almost $12 per SF, representing a 19.8% increase year-over-year. Class-B properties also saw their average rents increase to $9.51 per SF, which represents a 16.8% growth rate over the last 12 months. 

Denver’s industrial market has also added a lot of new supply over the last 12 months, particularly in the northern part of the city near I-70 and by Denver International Airport, according to Avison Young. While this activity has helped push Denver’s industrial vacancy rate up from 5.6% in Q1 2022 to around 6.3% in Q1 2023, it has also served to increase the asking price for industrial space since the new properties often come equipped with the newest technology. 

The increasing cost associated with Denver’s industrial spaces has made it harder for cannabis companies of all sizes to stay in the area. For example, marijuana wholesalers like Curaleaf — one of the largest cannabis companies, operating 147 dispensaries — decided to shutter its operations in Colorado, California and Oregon because of ongoing price compression, according to a note sent to investors in January. The company also consolidated its manufacturing operations in Massachusetts to a single location in Webster, which speaks to the struggles that similar marijuana companies face. 

Curaleaf CEO Matt Darin said at the time that these states could “represent opportunities in the future,” but that the “current price compression” has prevented the company from “generating an acceptable return on our investments.”  

The impacts of the price compression Darin spoke of came to light in Curaleaf’s Q1 earnings report, released May 17. In the report, Curaleaf noted its wholesale operations brought in $62.1M of revenue in Q1, an 11% decline year-over-year. 

The spaces left behind by some of the cannabis companies leaving Denver have created new opportunities for existing businesses to rethink their operations, according to Kevin Koernig, who owns Studio K2 Architecture, a firm that has been active in the marijuana space for several years. 

“On the wholesaling side, we’ve seen a real scaling back on some of our projects,” Koernig told Bisnow. “But on the dispensary side, we’re seeing a lot of people leaving medical and switching to recreational. And it’s impacting their bottom line in a good way.” 

Koernig said some of his clients like Mighty Tree and Higher Grade have grabbed up some old warehouse spaces that other marijuana companies are leaving and are adapting them into new dispensaries. However, Koernig said he is also noting that these companies have “less ambition” regarding how much space they take up and how many high-end finishes are included in the final designs.