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How Denver restaurants and retail adapt to rising rents

Residential renters are hurting, but what about commercial tenants?


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River and Woods in Boulder

 

In 2015, 100,000 newcomers migrated to Denver, buttressing the city’s status as a boomtown, and accounting for a laundry list of distinctions: Best Place to Live (U.S. News and World Report), fourth Best U.S. City for Young Entrepreneurs, and sixth Best U.S. City for Foodies (NerdWallet).

We’ve read about the resulting plight of residential renters. What about commercial tenants?

Squeezed by high demand and low supply, the direct average lease rate for retail space in downtown Denver has jumped to $22.53 per square foot, according to the Downtown Denver Partnership’s 2016 State of Downtown report. Restaurants in that vicinity, though, account for 49 percent of sales tax collection, totaling $45 million. In the current real estate climate, the restaurant industry looks a little like America’s social stratification — big businesses thrive, startups tend to flop and those caught in the middle must innovate.

NEIGHBORHOOD VARIANCES

The general rule is simple: A restaurateur’s occupancy cost – rent plus interrelated fees – shouldn’t exceed 10 percent of gross sales. For many local joints, though, it’s become challenging to operate within those parameters.

Mary Nguyen, for example – owner of Olive & Finch and P17 – is preparing to expand into Cherry Creek North this fall with a second Olive & Finch location. She’s willing to pay a premium for heavy foot-traffic and strong branding – one that’s higher than the 10 percent occupancy cost norm. “Cherry Creek,” Nguyen says, “is by far my highest rent per square foot.” The rent in Cherry Creek is estimated to be 30 percent higher than LoHi, and more affordable than LoDo, which is comparable to Boulder’s Pearl Street Mall.

Punch Bowl Social founder and CEO Robert Thompson secured his deal in Denver’s Baker district in 2010, and it’s “screeching good,” he says. Thompson is shopping other Denver neighborhoods to expand his “eatertainment” concept, and the next deal might be less economical.

“Denver’s hot, and prices are well represented compared to the national market,” Thompson says. He gave up on the Highlands years ago, and is exploring South Denver, where high restaurant capacity is fortified by residential density. He also shuttered his Uptown gastropub, Argyll Whiskey Beer, in May, and is fine-tuning details for a Punch Bowl Social in the former Stapleton International Airport air traffic control tower. At the city’s northeastern limits, Thompson explains, rent is controlled by “the fact that there aren’t a lot of areas to develop.” Leases get cheaper as you move away from the city’s core, says Hosea Rosenberg, owner of Blackbelly Market and Butcher. RiNo still has deals, he says — and there’s always Glendale.

TIME MATTERS

“Rental rates have probably doubled in the past 10 years,” Rosenberg says. Nguyen leased the storefront for her inaugural Olive & Finch three years ago. It’s located in Uptown, two doors down from P17 — and the lease was higher than what she signed for P17 in 2005.

Restaurateur Josh Dinar entered the industry in Denver in 2005, with an eatery on 16th Street Mall. “We got in right before the market crashed; landlords were being really competitive,” he recalls. When Dinar came up for renewal on that lease, “Things had recovered a bit, and all of a sudden our new lease was going to be close to double than where we started,” he says.

That’ll make it challenging for anyone to run a restaurant. “We can’t necessarily pass [lease] costs on to the customer,” says Nguyen, adding, “It hurts your bottom line.” As the climate for tenants changes, Nguyen says, “Landlords are asking more, and we’re walking away with less.”  
Well, not all tenants.

Large corporations – those capable of signing 30-year leases – gobble up prime real estate. In Boulder, Dinar says new construction is what’s driving up leases, and national chains are changing the face of the town. Dinar and beloved Denver chef Daniel Asher will fight back with their community-sourced restaurant, River and Woods, set to open on Pearl Street Mall in early July. River and Woods overtakes the John’s Restaurant space, formerly a family-owned business boasting a 30-year run.

“The family still owns the property,” Dinar says. There was interest in converting the plot into mixed-use space. “But,” Dinar says, “they wouldn’t take the financial highest and best use; they waited for the right local, family-focused restaurant concept.”

CREATIVE RESPONSES

Some restaurateurs are “looking to the outskirts,” continues Dinar, pointing to districts such as RiNo and Five Points. Established local restaurants are also sniffing around Lafayette, Louisville and Fort Collins — and these communities are welcoming them with open arms. Jax’s Fish House and Oyster Bar, for example, opened in Fort Collins in 2011, after Snooze and a year before The Kitchen. The lease rates were enticing, but the main motivation was “wanting to serve an additional community, and feeling like our concept fit there,” explains Adam Reed, director of operations for Jax.

Small businesses and startups are more likely to respond to the market by unearthing creative ways to utilize space — perhaps bringing multiple functions together under a single roof. Rosenberg started out with a catering business in Boulder, which didn’t require much more than some commissary space. When he moved to a new commercial kitchen in an industrial part of Boulder, he turned half of the facility into a restaurant, and opened Blackbelly Market before launching a conjoined butcher shop in early May. There’s no natural foot traffic by Blackbelly, and that means Rosenberg has had to “make a statement,” he says, noting a high-low food concept that’s appealing to patrons.

In LoDo, the Downtown Denver Partnership is collaborating with Rialto Café and the Courtyard Marriott Denver Downtown to present Brewer’s Alley to host a beer-tasting event in the alley.

Increasingly, startups forgo the traditional storefront route, relying instead on shared spaces to cut costs. In the restaurant industry, this idea is embodied by  Avanti Food & Beverage, a cafeteria-style incubator that’s been a godsend for new restaurateurs – oftentimes local chefs – looking to nudge into LoHi.

“Our entry fees are minimal compared to starting up a restaurant; we charge a flat rate, plus a small percentage of sales,” says Patrick O’Neill, co-owner of Avanti. “I think one of the reasons we’ve had so many applicants is because of the tough real estate market.” Three of O’Neill’s seven tenants started as food trucks. The owner of MiJo, on the other hand, was a longtime sous-chef at Bones, a Troy Guard restaurant. “These are people who have put in their time,” O’Neill says. “They’re talented, and needed a way to get started.”

Avanti works because, “It’s a known truism that the more restaurants you have together, the better they do,” explains Chris Frampton, managing partner at East West Partners.

When it comes to new development, his firm creates critical mass by focusing on density and mixed-use. “Rents are going up for restaurants,” Frampton says. But, he adds, “Performance of existing restaurants in LoDo and Union Station justifies the rent.”

TRUCK TO TABLE

Some startups circumvented lease costs by launching with food trucks; now, owners are parking their wheels in front of brick-and-mortars. Joe Knoblich founded his Latin-Asian food truck, Chuey Fu’s, in the winter of 2013, and will open a permanent brick-and-mortar this summer, at 1131 Santa Fe Drive, the former location of Nate’s Crown Liquors.

“The food truck has done pretty good; I created a loyal following, and this came out of necessity,” Knoblich says. Rent in the Santa Fe Art District “isn’t bad,” according to Knoblich, who says, “I feel like I’m coming in on the cusp of development.”

Chef Tim Payne – the man behind Colorado Farmer Girl – was launched in incubator space at Avanti Food & Beverage, and has plans to open his own standalone shop in Lyons.

The chef is no stranger to running a freestanding restaurant: He previously owned Terroir; he also took over Boulder’s Tasterie food truck before opening Farmer Girl.

The Landmark retail space

 

RETAILERS REACT

Area retailers are taking cues from local chefs, with their own incubators and trucks. Denver Flea, for example, mirrors the Avanti Food & Beverage concept, giving small businesses opportunities to test their product in a shared space in front of tens of thousands of consumers. “That’s invaluable to understanding if a standalone storefront is within reach,” says Denver Flea co-founder Blake Adams.

He and his partners didn’t start Denver Flea in 2014 in response to rising real estate costs, but their quarterly market – set to expand to the suburbs this year – has certainly had the effect of bolstering startups. “Some of our vendors have brick-and-mortars, but for many that’s a longer-term goal,” Adams says. His upcoming Flea had more than 700 applications, and hits City Park on Aug. 13 and 14.

Other retailers – mainly small boutique owners – founded their businesses with fashion trucks — a phenomenon that popped up around 2013 with Denver Fashion Truck, one of the city’s first mobile boutiques featuring local art, clothing and vintage pieces. Success gave way to a second fashion truck, making Denver Fashion one of the only fashion trucks in the nation to have two trucks. Megan Timlin’s first “storefront” was her truck, Whorl on Wheels; La Lovely Vintage rolled out as Lucy, a 1957 trailer repurposed into a mobile showroom, and founder Tara Lovato currently operates from a shared space, Backyard on Blake, where another fashion truck sought its storefront, too.

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Jamie Siebrase

Jamie Siebrase is a freelance writer based in Colorado.

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