Distress In D.C. Restaurant Industry Has Landlords Offering Better Deals

D.C. is one of the country’s most diverse and celebrated culinary destinations, home to 26 Michelin-starred restaurants and a magnate for famous chefs from around the world.

But the city’s more than 2,600 restaurants have hit a moment of distress. 

Over the past month, multiple D.C. culinary mainstays announced they would be closing, including Michelin-starred Tail Up Goat in Adams Morgan, American gastropub Brookland’s Finest, H Street Asian fusion eatery Sticky Rice and Penn Quarter barbeque institution Hill Country.  

Last year, 101 D.C. restaurant and tavern licenses were canceled, according to the city’s Alcohol Beverage and Cannabis Association, up from 64 licenses canceled in 2023. 

A Restaurant Association of Metropolitan Washington survey of 200 casual full-service restaurants between January and February found that 11% of those restaurants said they were “very likely” to close, while 33% said they were “somewhat likely.”

“It's all about survival,” RAMW President Shawn Townsend told Bisnow. “If they didn't close today, they made it through today, and tomorrow's another. It’s just that severe right now.”

The distress, which has been widely reported, is arising from a compilation of factors, including national pressures like inflation and pandemic-induced consumer behavior shifts, and local factors like D.C.'s new tipped minimum wage law and cuts to the federal workforce. 

But despite these pressures forcing businesses to close, D.C. is seeing net growth in the restaurant industry.

Last year, ABCA awarded 122 new restaurant and tavern licenses, and new headlines about D.C. restaurant openings pop up on a weekly or even daily basis. 

For these new restaurants opening, an environment has emerged where tenants paradoxically have the upper hand, several D.C. retail brokers told Bisnow. 

Landlords are willing to stretch further for deals with good restaurant operators, putting unprecedented amounts of tenant improvement allowances and flexibility on the table to secure their value. 

‘“Landlords are definitely more flexible today than they have been,” Papadopoulos Properties President Tom Papadopoulos said. “It’s almost compared to the Covid period, where landlords were concerned about leasing their spaces and they were pretty aggressive on deals, and today they're still pretty aggressive.”

And tenants are looking to save where they can, knowing that operating a restaurant in this environment is more costly and risky than ever. 

“Ones that want to open are looking for every way to mitigate their risk, whether its lower rents or TIs or both, so they can have a successful, financially beneficial operation,” Miller Walker principal Bill Miller said

Tom Tsiplakos, founder of For Five Coffee Roasters, opened Bar Angie this month at 2300 N. St. NW, an office building where the Aspen Institute is headquartered. He is also behind Dupont Greek restaurant Balos.

His newest restaurants are still benefiting from the Covid-era hangover effect, where office landlords push hard to get food and beverage into their ground floors. As he has built up more of a rapport, he’s been able to get better deals.

“Because of our track record with For Five, landlords have been willing to make fair deals with us again,” he said. “They're not giving the places away, but they’re trying as best they can to underwrite in a way that helps with the costs or portion of the cost of construction.”

Dochter & Alexander principal Dave Dochter, who leases retail downtown, said restaurant deals today are a world away from prepandemic models.

“They're indicative of what the current environment is, and that's sales, that's labor, that's all of those other factors coming in,” he said. “So generally it's lower risk, and generally it might be higher TI, but for that, you're often getting some very strong operators that are seeing this as an opportunity to come into the marketplace.”

In particular, tenant improvement allowances are much higher than they were in the past, retail brokers said. 

TIs today are double what they were prior to the pandemic, according to Miller. Previously, a typical TI for a full-service “name” restaurant would be around $100 per SF, but today it’s more likely that the landlord would put in $200 per SF to secure that deal.

“Landlords are reaching further for new deals,” Miller said. “They're adding significant amounts of additional tenant improvement allowance in many cases.”

For restaurants in office buildings, landlords are especially hungry to secure and keep restaurant tenants, seeing them as a valuable asset for their properties. 

“They are offering substantial tenant improvement allowances to attract those tenants that would help them attract quality office tenants,” Neighborhood Retail Group co-founder Bethany Kazaba said. 

She added that for successful operators, it's “really a tenants' market.” 

The rub for many downtown office buildings though — on top of challenges facing all restaurants, like wage increases and inflation — is that the office traffic is still a long way from recovery, meaning these restaurants need even more help from their landlords.

“Most restaurants that are in the business district that are still open — most of them are on some type of accommodation by the ownership,” Miller said.

While landlords are offering higher TI allowances, they aren’t a silver bullet for restaurant tenants. 

Some restaurant owners are more cautious about taking larger TI packages up front since it typically increases their monthly rent payments.

Tim Ma, the D.C. restaurateur behind Lucky Danger, Any Day Now and Kata, says he sees a downside in asking for more TI up front when he knows he would just have to pay more rent on the back end. 

And with the restaurant industry being such a difficult business right now, he wants to save where he can when it comes to his monthly outlay. 

“Positive cash flow is king within the restaurant,” he said. “So if we don't have that because I took a bunch of money up front and now my rent is out the roof, then I'm not going to survive.”

In addition to TI, landlords are offering flexibility through percentage rent deals — in which they take a share of the business’s profit as the rent payment rather than a set amount. 

The arrangement became more common during the pandemic and has held on five years later as restaurants face the onslaught of challenges.

Insight Property Group principal Maury Stern said the Arlington-based developer has two tenants on percentage rent, a structure the firm had never done prior to the pandemic. 

But now, they’re willing to be more flexible when tenants need it. The landlord has two tenants on H Street that are on percentage rent — one that's been in the arrangement since the pandemic and one that goes on and off as needed.

“We’ve just had to be more flexible with good tenants, and knowing that they're valuable to our buildings, and that’s come in the form of either concessions on rent or percentage rent deals,” Stern said.

 Since higher TI makes signing new restaurant deals pricier for landlords, they are also more inclined to make accommodations for existing tenants to avoid having to start over with a new restaurant. 

Miller said many landlords have discovered that offering flexibility to existing tenants is a better financial decision than having to market the space, find a new tenant and help it build out a restaurant. 

Greg Casten, a longtime D.C. restaurateur who owns businesses such as Tony & Joes, Nick's Riverside Grill, Ivy City Smokehouse and The Point, said he expects landlords will have to work harder to hold onto existing tenants. 

“I think landlords are going to have to do deals to keep some of the tenants that restaurant-less landlords are trying to attract,” he said. “I can see a bidding war, and it's a big bid to make someone move.” 

The pressures facing restaurants that are forcing landlords to offer up more are not going to cease anytime soon, and additional challenges are on the way.

The consumer price index for food increased 3% over the last year, according to the Bureau of Labor Statistics’ March report. Egg prices in particular are soaring, rising 5.9% in March, as the industry deals with the latest bird flu strain.

Tessa Velazquez, who co-owns Baked & Wired, A Baked Joint and la Betty, said it has been a challenge to source eggs.

But now, she’s also concerned about the Trump administration’s tariff policies on the European natural wine she sells at la Betty. The restaurant’s supplier is stocked up for now, but she said that won’t last.

“That will affect us at some point, I'm sure,” she said.

Changed consumer habits during the pandemic are also proving sticky, with people staying in and taking out more, Brookings Institution fellow Tracy Hadden Loh said. And the financial relief that restaurants were granted during Covid has run out. 

“Many restaurants now find themselves with the same problem that they had two years ago: that their business model is not resilient to the ways in which the pandemic has changed consumer habits,” Hadden Loh said. 

In D.C., restaurants are faced with additional hurdles specific to the city. 

In May 2023, D.C. instated Initiative 82, a law phasing in a minimum wage requirement of $17.50 per hour for tipped workers by 2027.

Some restaurateurs looking to enter the market are opting for Northern Virginia or Maryland instead to avoid the requirement, CBRE said in a market report last fall. 

Sticky Rice and Brookland’s Finest both cited I-82 as factors in their decisions to close.

RAMW is calling on the D.C. Council to repeal the initiative. Townsend told Bisnow the legislation is “one of the main challenges that our restaurants face.”

The Trump administration’s cuts to the federal workforce are another headwind to the local restaurant scene. D.C. Chief Financial Officer Glen Lee projected in a March revenue forecast that the city will lose 40,000 federal workers by 2029. 

At the same time, the administration’s massive cuts to the federal budget are impacting private-sector jobs. D.C. has a high concentration of contractors and other recipients of federal funding like nonprofits, and those employers are beginning to conduct mass layoffs as funding is ripped out from under them.  

The job cuts have reversed the hope for a boon to D.C.’s economy and vibrancy that initially came when Trump declared federal workers would be back to the office five days a week just hours after he took office in January.

“The people that were forced back to work are now not coming back to work,” Kazaba said. “So the positive impact of being forced to go back to the office and reactivate the several-block radius of the office — restaurants and cafe tenants and small businesses below — evaporated.” 

Casten now finds himself closing some of his restaurants at 10:30 at night because the traffic is so much slower. The downswing in customers combined with challenges like wages, inflation and permitting delay, are adding up — and taking a toll on the industry, he said.

“I know a lot of long-term, longtime restauranteurs don't want to do it like they used to,” he said, “It used to be a labor of love, and you really enjoyed being in it. And now everyone's like, ‘It's so hard.’”