Experts expect more vacancies, better deals
Pandemic challenges make it hard Wor businesses to pay the rent
“... There is not a lot of guidance. When can a landlord charge interest and late fees in 2020?” Merc Pittinos, a real estate ligation attorney
Retail and restaurant space in Denver is emptying out faster than it has in more than two decades as the coronavirus pandemic rages on in the state. Things will likely get worse before they get better.
Through the first nine months of 2020, businesses have either vacated or left empty more than 662,000 square feet of new and existing retail space in the DenverBoulder metro area, according to real estate services firm CBRE. That’s the highest ninemonth total since 1998. Marketwide, vacancy is 7.5%, the highest its been since 2011.
“With increasing amounts of bankruptcy announcements from national retailers in addition to numerous local restaurant and store closures, the overall impact to retail real estate is likely not fully realized yet,” CBRE researchers warned in the report issued last week.
As COVID- 19 infections spike in Colorado, and local public health officials tighten restrictions on businesses’ capacities and hours, those hanging on by a thread do have options. Many landlords are amending leasing and deferring rent. There are grants available to help restaurants expand outdoor seating. It if
comes down to it, they can lean on a portion of Gov. Jared Polis’ eviction moratorium for some protection.
In Denver, Bar Helix owner Kendra Anderson had been operating her Larimer Street business entirely outdoors up until last month. She got through the summer, celebrated her restaurant’s third anniversary and then announced it would be closing temporarily to transition from an outdoor setup to indoors.
At the end of October, Anderson received a notice that she had 30 days to pay around a $ 25,000 default on her lease agreement or else vacate the bar’s space. Anderson said she was considering about 10 different pandemicfriendly winter setup options when she got this news, but she was having trouble executing any one of them quick enough.
“I’m not at all saying I don’t owe ( my rent), or I shouldn’t be paying it,” Anderson told The Denver Post. “But I need a minute.”
At first, she was given three days’ notice from her landlord to pay the default or vacate. But Anderson realized she and other small- business owners do have more time to make up rent during the pandemic.
Under Gov. Jared Polis’ executive order enacted on Oct. 15., business tenants like Anderson are entitled to 30 days notice if their landlord is planning to evict, 10 times longer than before. The protection is in effect through Nov. 14 unless Polis moves to extend the order. Late fees are suspended through the end of the year.
Polis took action early to limit commercial and residential evictions, signing a similar executive order in the spring before letting it lapse in June. A spike in commercial evictions followed in early summer, said Merc Pittinos, a real estate ligation attorney with Denver law firm Moye White. In commercial evictions that have gone to trial, Polis’ orders have come up nearly every time, Pittinos said, particularly the suspended late fees.
“It has led to a lot of creative arguments that judges are having to figure out,” Pittinos said “And there is not a lot of guidance. When can a landlord charge interest and late fees in 2020?”
For Denver restaurateur Frank Bonanno, the clock is ticking. Bonanno said he is paying a lower, deferred rent on his food hall Milk Market at the Dairy Block property in Lower Downtown. That deferment lasts through December, so he will need to make it up starting in January. Rather than finding another compromise, though, Bonanno said he has been asked by his landlord McWhinney to vacate the space after 2020 and help transition Milk Market’s ownership. Otherwise, come Jan. 10, he’ll have more than $ 80,000 in monthly rent due.
“The question is,” Bonanno said, “how long can a business afford to pay that kind of rent doing 8% of its sales?”
Dairy Block general manager Don Cloutier said that McWhinney has agreed to eight lease amendments with Bonnano and that he is current on his lease obligations as of Friday. Despite not receiving any forbearance on its debts, McWhinney has worked with other Dairy Block tenants on lease amendments, Cloutier said.
“Dairy Block has been working closely with all of our tenants and the City & County of Denver to offer expanded outdoor seating options that are compliant with all current social distancing mandates and liquor laws,” Cloutier said in an email. “We continue to allocate dollars, proportionately, to invest in expanded patios, planters, cushioned seats and custom tables.”
Bonanno is far from the only business owner behind on his rent.
On a national level, just 78% of U. S. retail tenants paid rent in July, according to research Datex Property Solutions, a company used by CBRE. At the end of September, that number had risen to 83.2% but was still more than 10% below September 2019. National companies paid their rent at a rate 6.2% higher than local businesses in September, Datex found.
In the months since that summer spike, Pittinos said commercial evictions have slowed down. He attributed that to landlords’ desires to work with their tenants where they can.
“The executive orders are helpful for tenants, but a lot of people are working collaboratively to solve problems,” Pittinos said.
City Street Investors co- founder and principal Joe Vostrejs is both a landlord and restaurant partner for a number of Denver businesses. Because he’s also “in the ( restaurant) business,” Vostrejs said he’s allowed many of his tenants to move to a percentage rent structure — one that rises and falls with sales — to survive the effects of the pandemic.
“We’re trying to provide them with a rent structure that lets
them survive, and I think that’s the key right now, is we’re trying to keep everybody surviving,” Vostrejs said. “We’re going to want these tenants to still be there and be alive when the days grow longer and it gets warmer and they stand a shot. ...”
The economic pain of the coronavirus pandemic has not been visited equally across the metro area, according to commercial real estate information company CoStar. Some suburban areas have actually seen retail sales rise this year, said Michael Petrivelli, a CoStart market analyst.
“But in downtown and Cherry Creek they are down considerably,” Petrivelli said.
Despite the pandemic, Petrivelli said leasing activity in the metro area is strong.
“It was actually one of the better quarters for leasing since 2016 that we’ve had,” he said of July through September, though he cautioned data is still being collected.
The Dairy Block recently announced a flurry of new tenants. And Vostrejs said over the last six months he has signed new leases with a lot of “wellness- related”
businesses.
Petrivelli attributed some new lease activity to flexibility on the part of landlords who now recognize it is becoming a tenants’ market. Kids Empire, an indoor play place, signed a lease for $ 14 per square foot in Westminster, about 33% under the market average for the area, Petrivelli said. The business is not expected to open until late next year when hopefully the virus will be better contained.
Still, rental rates remain high. CBRE has Denver’s average rent for the third quarter pegged at $ 20.06 per square foot, up 2.5% year over year, but a correction could be coming based on deals like the one Kids Empire just struck.
“Obviously not every landlord and tenant is going to disclose what their rent is, but those that we have collected there are a lot under market for sure,” Petrivelli said.
Headlined by bankruptcies and downsizing from big national companies like 24 Hour Fitness, which closed 10 metro area locations this year, Petrivelli said the vacancies are driven mostly by smaller spaces, those under 20,000 square feet, emptying out.
“A lot of it is restaurants and bars, a lot of it is smaller businesses, unfortunately,” he said.
Eventually, Vostrejs said a certain “creative destruction” is coming to Denver, especially downtown. Because even as more restaurant spaces go vacant, “they won’t stay vacant forever.” And with infrastructures already in place and rents likely cheaper coming out of 2020, an opportunity will arise for new entrepreneurs.
“But the downside is that there could be a bleak period between when we go vacant and when we can look forward to things opening up again,” Vostrejs said.