Tipping Phase-Out Adds New Concern for DC Retailers

Like the fierce bike lane debate that played out earlier this spring, the heated discussion about wages for tipped workers seems to be about more than just fair pay, instead tapping into wider fears about the city’s business climate and the fate of the central business district, as the city’s office population continues to hover around 53 percent of pre-pandemic numbers. 

“The new hybrid working schedule is certainly hurting the downtown dining scene,” said Connor McCarthy, Transwestern’s director of retail services. “We can’t support a steakhouse on every corner on K Street.”

Much of the restaurant industry opposed the initiative, citing the weight of additional payroll costs during a difficult post-pandemic market. Many restaurant owners spoke of the need to change their models, perhaps creating systems of self-service or runners, and even swearing off opening more D.C. locations. “You couldn’t really ask a business that has pretty low margins to all of a sudden scrape together an extra $500,000,” local restaurant owner Geoff Tracy told Washington Monthly. 

“Landlords are already struggling enough on the office side,” Transwestern’s McCarthy said. “Do they need to reduce their rent by 50 percent to bring in a restaurant that’s likely to not be able to make their numbers? It’s a really hard situation. Everyone’s cautious, no one wants to make a mistake.”

Kathy Hollinger, who until recently was president of the Restaurant Association of Metropolitan Washington, argued that applying this standard just in D.C. would drive the industry to suburban markets. 

“Anything that makes it harder for a restaurant to make money is going to deter them,” added McCarthy. “Whatever it might be, they’re working on razor-thin margins. So even the smallest shifts can be dramatic.”

The initiative arrives as a have and have-not dynamic appears to be developing among D.C. neighborhoods when it comes to retail and dining performance. Overall numbers from a spring report from Dochter & Alexander, a local retail adviser, peg the rental vacancy rate at 13.1 percent, a slight improvement over last quarter. It also suggests a significant number of new restaurants coming to town, with 94 preparing to open, including an array of high-profile, celebrity chef-driven spots, including Gordon Ramsey’s Street Pizza and an unnamed Tom Colicchio concept at Market Square. 

In comparison, 40 restaurants closed in 2021, and 48 shuttered in 2022. Not surprisingly, restaurants in vibrant, mixed-use residential spaces in and near the city have been performing relatively well; McCarthy called out Union Market, which is doing “tremendous numbers,” as well as Bethesda Row, which has a 2 percent vacancy rate. 

Andy Corno, executive vice president of JLL’s D.C. leasing team, said the Navy Yard and Georgetown have been “on fire” with respect to new tenant signings and openings, with retail rents holdings steady or even budging upward a bit. He agreed that rising labor costs already have been “pinching the bottom line” for the food and beverage world, but landlords have reacted by being more creative in structuring leases to attract and maintain new restaurant locations. Downtown did see the most closings, he said, but he’s also seeing the most signings and openings there. 

“There has been some resilience from leaders in the restaurant and retail community to take a bet on downtown,” Corno said. He points to the new Tatte Bakery & Cafe location in Farragut Park that opened in late May as an example. Landlords are willing to budge on rents, to scale rent prices in relation to the lower level of foot traffic. Downtown, he said, has seen in some cases, rents drop 15 to 30 percent, with concessions coming up, especially for retail space at the base of office buildings. Nationally, rising rents has been a key issue facing the restaurant industry. 

“These strong tenant leaders come in, with less competition, and perform well, and it’s exciting,” Corno said. “You’ll be surprised about how many storefronts are going to open this year.”

The reaction to the initiative’s passage has been a mixture of muddled and anxious. Many restaurateurs have suggested they’ll incorporate a mandatory service charge or raise prices. D.C. Council members Kenyan McDuffie and Charles Allen have introduced legislation that would excuse mandatory service charges from sales tax (allowing restaurants to get tax-free money to pay additional payroll expenses). The move has been cheered by restaurant owners who fear lost revenue, and who don’t want additional sales impacting any rental agreements that link rent to business revenue. It’s opposed by many servers and supporters of the initiative, who think it discourages tips and, since it’s technically not earmarked to staff, can end up in owners’ pockets. The Restaurant Association of Metropolitan Washington, which funded a campaign to vote no on the initiative, has said they’re open to changes that would help owners and operators.

It’s also not totally clear that the phase-out of tipped wages will have the impact that opponents suggest it will. Numerous states, including restaurant-rich Nevada, already have similar legislation in action. Saru Jayaraman, president of One Fair Wage, has been working on these issues for 20 years, backing similar measures in dozens of states and cities. She said that the fear of these measures are misplaced. 

Data from the seven states that have long eliminated the tipped wage exemption show higher restaurant sales per capita and higher small business growth rates, including overall restaurant industry growth rates, since the elimination of the rule, Jayaraman noted. At a time when the restaurant industry is short of workers, and many restaurants have voluntarily raised wages to attract staff — Jayaraman said her staff has tracked 100 restaurants in D.C. alone that already pay the full minimum wage — she argues this initiative solves key labor challenges for employers.

“It’s always been the response of the Restaurant Association that, any kind of proposal for workers, the sky is going to fall, it’s gonna be terrible,” she said. “They said the same thing about banning smoking in restaurants. They said the entire industry was going to collapse.”

This wage policy shift comes at a time when Downtown D.C. itself is in flux, and in many ways, the debate speaks to larger questions of what kind of downtown comes next, and what’s the right policy to bring back vibrancy and business. McCarthy, like many, points to residential conversion of office spaces downtown as a potential boost to downtown dining, but that’s still a ways off. He doesn’t expect dramatic change anytime soon. But that, says Corno, is where we need to head.

“It’s become clear our downtown community needs to be truly mixed-use in nature,” he said. “That comes with more residential sitting next to and besides and on top of office and hotel and everything else. Then this market is going to become incredibly dynamic.”