The Landlord Landscape

How the real estate market has—and hasn't—changed.

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Like many restaurateurs, Frank Bonanno has gone through a lot since March 2020. He closed and reopened his 10 Bonanno Concepts restaurants while adapting to ever-changing governmental guidelines; he came down with COVID-19 and temporarily lost his senses of taste and smell; he remodeled and rethought his 20-year-old flagship restaurant, Mizuna. To cap it all off, in March 2021, he learned that the buildings housing Mizuna and three of his other eateries located on Grant Street and East Seventh Avenue are facing potential sale and demolition. Bonanno may be forced to shutter Mizuna, Luca, Lou’s Food Bar (formerly Bones), and Vesper Lounge in the not-too-distant future as the buildings’ owner, the Sherman Agency, explores redevelopment options.

Perhaps surprisingly, despite the challenges of the last year, Bonanno harbors no ill will towards the Sherman Agency—or any of his landlords, for that matter. The way he sees it, it’s just business. Given the demolition clause in his lease (and in most commercial leases), the Sherman Agency has every legal right to sell the property. There’s only so much control a restaurateur has over a pre-existing leasing agreement, so Bonanno would rather direct his energy towards things he can control. “I don’t know what my hope for the future is,” he says. “I do know what we’re working towards: our values and vision, employing as many people as possible, and offering a great experience. That’s really what it’s about.”

Relationships between landlords and restaurant tenants are complicated by nature. Ideally, landlords and tenants work together towards a common goal of enduring success, sharing in the good times and collaborating to make it through the bad. But when things go south, operators can find themselves booted with little warning, stuck in an agreement they can’t extricate themselves from due to a binding personal guarantee, or on the hook for serious cash, even if they previously sold their interest in the business.

COVID-19 and the ensuing shutdowns and capacity restrictions were a near-universal stress test on these relationships. In spring 2020, the general mood of the industry could best be described as apocalyptic. Without significant government aid, chef and television star Tom Colicchio estimated 75 percent of independent restaurants wouldn’t make it through the pandemic. Desperate restaurateurs were generally at the mercy of their landlords as they negotiated for rent relief or deferment. 

Some landlords, including Bonanno’s, were willing to work with their tenants. “When restaurants have a government mandate to close or limit capacity, how can you ethically, as well as practically, ask them to pay full rent? You can’t get blood from a rock,” says Kelly Greene, president of Urban Legend Partners, who has brokered close to 250 restaurant deals in his long Denver career.

According to Hoff & Leigh’s Q1 2021 Retail Market Report, the pandemic-induced downturn of March and April 2020 also slowed investment activity in commercial retail property along the Front Range “dramatically.” 

Other landlords, however, were not as flexible. Wayde Jester, operator of Zeal, found himself in a nightmare scenario last summer. As he describes on The Modern Eater podcast, he arrived one morning at his restaurant in the Landmark development near the Denver Tech Center to find the entire contents of Zeal—“everything that could be moved without a professional plumber or electrician”—scraped, bagged, and piled in the parking lot out front. 

Zeal’s second location (the first is still going strong in Boulder) had only been open since November 2018, and was just starting to find its groove at the Landmark when COVID hit. Unable to pay rent, Jester was desperate to negotiate a tenable path forward with the landlord, Sperry Properties. He proposed tying rent to sales for the duration of the pandemic and other workable concessions. But according to Jester, the landlord was not interested in a compromise. And while Sperry Properties was acting within the bounds of the law, the process was shocking and callous. In response to being contacted for this story, Jester declined to speak about the specifics of the scenario but did add: “The whole ordeal has helped make me a more resilient human.” He also notes, “No one has taken the space yet. They finally pulled the Zeal sign off the storefront this past month, but the space has been unoccupied since September. I’ve never even seen a lease sign posted on the glass.” Sperry Properties did not respond to request for comment.

Overall, the industry fared far better than expected, with approximately 17 percent of restaurants shuttering—well below Colicchio’s prediction, but a staggering figure, nonetheless. And situations like Jester’s have significantly altered the commercial real estate landscape. According to Hoff & Leigh’s Q1 2021 Retail Market Report, the pandemic-induced downturn of March and April 2020 also slowed investment activity in commercial retail property along the Front Range “dramatically.” 

“The landlord-tenant relationship is built on a very simple base: supply and demand,” says John Imbergamo, a Denver-based industry consultant. “More restaurants closed, so supply is up. It’s pretty simple to come to the conclusion that the balance has not necessarily shifted in favor of tenants, but has probably evened out a little bit.”

Illustrated rendering of a modern two-story restaurant occupying a corner space, with chairs on patio and sliding doors opening from dining room onto patio. Building is dark gray with light tan accents.

Second Gen vs. Buildout

With the abundance of available second-generation spaces, those looking to expand have lots of inventory to choose from. On the flip side, however, there are also better-than-usual terms to be had for operators considering full buildouts. “I think people will take a much stronger look at second-generation spaces or require much better deals for full buildouts,” Imbergamo says. With better terms on tenant improvement (TI) allowances, this is a good time for those in a position to take on an ambitious investment buildout. “For new-build construction, landlords are doing more aggressive TIs [than they might have previously] to help offset those costs,” says David Dobek, a commercial real estate broker at SullivanHayes Brokerage. There are especially good deals to be found at mixed-use buildings: “The best deals for tenants are in mixed-use buildings, by far,” says Greene. “The restaurant is an amenity, and it provides some competitive edge for prospective office tenants shopping for space.”

“I think people will take a much stronger look at second-generation spaces or require much better deals for full buildouts.”

John Imbergamo, The Imbergamo Group

Brokers are also seeing a large amount of interest in smaller restaurants. “That’s been a trend that’s been going on for a while,” Greene says, “and is…continuing partly because rents have gone up.” (Given how far the real estate market lags behind the rest of the economy, rent prices have not dropped following COVID, but experts believe lower leasing demand will soon result in lower commercial leasing rates.) Quick-service and chef-driven, independent restaurants push the trend to smaller spaces, but with costs like food and staffing also on the rise, it makes sense that an even larger pool of restaurateurs would consider smaller spaces to reduce overhead. That way, even if triple-net expenses climb dramatically year over year, you’re looking at less square footage, and, therefore, lower long-term costs.

Quick Recovery

Recovery of the commercial real estate market along the Front Range is bouncing back to pre-pandemic levels much more quickly than predicted. “The market in Denver is pretty active,” says Joe Vostrejs, founder and principal of City Street Investors, and himself a partner in multiple Denver-area restaurants. “There are a lot of tenants looking for space, and good spaces are leasing very quickly at normal rates. We’re not sensing big discounts.” 

Health and wellness businesses, in particular, are gobbling up retail space along the Front Range. And Vostrejs says it’s important to remember that some restaurant tenants have done just fine during the pandemic. Many quick-service spots—especially chains—selling takeout-friendly fare like pizza and wings are primed to expand after enjoying a banner business year. Dobek, whose brokerage handles transactions from Fort Collins to Colorado Springs and across the I-70 corridor, agrees. “There’s not a lot of new restaurant leases being signed, and those that have been signing are generally from certain categories that have done very well…lots of groups more so than urban independent restaurants. We’re still staying very busy and seeing volume on a transactional standpoint.”

“There are a lot of tenants looking for space, and good spaces are leasing very quickly at normal rates. We’re not sensing big discounts.”

Joe Vostrejs, City Street Investors

According to Hoff & Leigh, employment centers such as downtown Denver and Cherry Creek have been disproportionately negatively impacted due to the loss of office workers and large events, while some suburban areas (especially Aurora and the northeast submarkets) have actually seen an uptick in real estate sales as more residents work from home and look for local services. And other areas—such as the tourist-heavy mountain corridor—never saw a downturn at all. 

In Breckenridge, tourists continued to pour in throughout the pandemic, and the town stepped up in a big way to assist businesses and landlords. According to broker Jack Wolfe, the town’s generous financial assistance meant that virtually no restaurants failed as a result of the pandemic. Retail vacancy (excluding office space) in Breckenridge remains around one percent. “We fully expect restaurant folks to come out of this fully stable,” Wolfe says. 

The pace of restaurant deals in Denver is beginning to ramp up, too. More ambitious operators are charging full-speed ahead, trying to get deals done now as they look ahead to post-COVID times. Vostrejs believes that higher-end restaurants in particular will soon see a speedier recovery given that their generally older clientele are now vaccinated and there’s a large amount of pent-up demand for this rarefied experience. “It’s Darwinian—the ones left standing are going to kill it,” Greene agrees.

That’s certainly been true for Bonanno. Mizuna, the most traditional fine-dining restaurant in Bonanno Concepts’ portfolio, is outperforming the rest of the group. “We leaned into it being expensive, and it’s our busiest and hardest-to-get-into spot right now,” he says. Still, overall recovery for operators like Bonanno won’t happen overnight. “There’s a lot of optimism, but 2021 is going to be a difficult year. I’m getting tons of notifications about spaces becoming available, but banks are not lending as much. Probably one in 20 restaurants can show an increase of profit on their P&L through 2020. Very few restaurateurs have the ability to buy a restaurant.”

Blue and white sign reading "For Sale" on a commercial space with medium gray stucco and white brick walls.

Buy, Baby, Buy

For those who can purchase rather than lease space, now is the time, as retail demand remains relatively low and vacancies are still high. Marilyn Megenity, owner of Denver’s Mercury Cafe, credits owning her building as foundational to her business’ enduring success. “Real estate prices in the ’90s were at the bottom, and it was miraculous I was able to buy this building,” she says. “It changed everything. I was in business for 15 years before I managed to buy it, and I had moved locations several times because of serious landlord trouble.” Megenity is currently in the process of retiring and is looking to sell her building and business to someone who will continue running her vision of an inclusive event space and organic food restaurant. She acknowledges that building a legacy business like the Merc from the ground up has certainly gotten more difficult as Denver landlords “have gotten wild-eyed with the rent.” Her advice? “Own the building or be in a partnership with your landlord.”

“No matter how good the relationship is with your landlord and business partner, you definitely have to scratch the surface a little bit and establish what’s real.”

Mario Nocifera, Beacon

Given that buying space is a financial impossibility for most Denver restaurateurs, focusing on finding a solid landlord partnership is the best bet. But as restaurateur Mario Nocifera knows, even the best-possible landlord relationship is still far from a guarantee of success. While Nocifera had a fantastic partnership with his landlord at Lower48 Kitchen and a great deal on rent in the up-and-coming Ballpark neighborhood, it wasn’t enough to save his ambitious fine-dining restaurant from its poor location. Despite critical acclaim, Lower48 closed in 2015 after less than three years in operation. “No matter how good the relationship is with your landlord and business partner, you definitely have to scratch the surface a little bit and establish what’s real,” he says. “The Ballpark neighborhood was going to be something someday, but what was the here and now? I always knew it was a questionable location.” (Find out how to choose a landlord like a business partner here.)

Greene underscores the importance of doing your homework. “Don’t make assumptions about the demographics near your location,” he implores. “Do as much detailed research as possible before signing a deal so you can go in informed on who your people really are. Don’t be shy in asking nearby restaurants how much they’re grossing and what the sales are per foot. In Colorado, this is not publicly reported, so you really have to dig to get the reconnaissance.” 

After laying low for a few years, Nocifera is currently in the process of opening a dance club called Beacon. You can bet he’s done his homework. He’s excited about both the prime RiNo location and working with a landlord who he believes has the neighborhood and his business’ best interests front and center.

Meanwhile, Bonanno is still holding out hope that his offer to buy the Seventh and Grant property from the Sherman Agency will be accepted. If not, he could soon be in the position of vacating the premises and relocating his businesses. (As of press time, the Sherman Agency had dropped its bid for a certificate of demolition eligibility for the buildings, but is still looking to sell.) In Aspen, a situation similar to Bonanno’s is playing out with the iconic Red Onion. The bar and restaurant has been in operation since 1892, but it temporarily shuttered during the pandemic. According to the Aspen Daily News, after allowing the Red Onion to terminate its lease last winter, property owner and local developer Mark Hunt is now entertaining conversations (including with the Onion’s owners) about what could fill the space.

“We don’t know what the future holds. We are in uncharted territory. But this requires communication, it requires a willingness to accept this is a real economic issue.”

Wayde Jester, Zeal

While the pandemic has helped restaurants reclaim a bit of leverage in their dealings with landlords, fundamentals of commercial retail leasing—such as demolition clauses and personal guarantees—aren’t likely to go by the wayside anytime soon. “We don’t know what the future holds,” Jester of Zeal says. “We are in uncharted territory. But this requires communication, it requires a willingness to accept this is a real economic issue, and for restaurants to come out of this looking at all like they used to, opposing parties need to start working together.”

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