The landscape of the restaurant industry is undergoing a remarkable transformation, particularly evident in locations where older dining establishments have closed. For instance, in Woodbridge, Virginia, a former TGI Fridays is being revitalized as a LongHorn Steakhouse, while Watertown, New York, is witnessing the conversion of a closed Red Lobster into a Northern Credit Union bank. In Naples, Florida, Chick-fil-A is repurposing another shuttered Red Lobster to establish its service. These instances indicate how vacant establishments provide lucrative opportunities for various companies, especially fast-food chains.
Several well-known casual dining chains, including Red Lobster and TGI Fridays, filed for bankruptcy in the year under review, leading to the closure of over 175 outlets collectively. Red Lobster’s decline has been attributed to poor management under its previous owner, Thai Union, a global shrimp supplier. Simultaneously, TGI Fridays struggled while under private equity management by TriArtisan Capital Advisors. Denny’s, another chain, is set to shut down approximately 150 of its locations, reflecting wider trends in the market.
The challenges faced by these traditional dining chains largely stem from evolving consumer preferences. Targeting low- and middle-income clientele, these restaurants have struggled as diners are increasingly opting for meals at home or choosing cheaper alternatives. Fast-food and fast-casual chains like Chick-fil-A and Chipotle are benefiting from this trend, with the latter being notably more profitable due to operational structures that require less staff and overhead than traditional sit-down venues. The adjustment in dining preferences post-pandemic has significantly impacted full-service restaurants, as articulated by Denny’s CEO, Kelli Valade, who noted a decline of 0.5% in consumer traffic, in stark contrast to growth in fast-casual and fast-food sectors.
Interestingly, many of these vacated restaurant spaces are not remaining empty for long. Landlords recognize the potential to attract new tenants who can pay higher rents and increase foot traffic to the locations. Jeff Kreshek, a senior vice president at Federal Realty, shared insights indicating that this trend is not surprising, viewing it more as an opportunity for real estate that was previously inaccessible for decades. The property previously housing an aging Red Lobster in Maryland and two operational TGI Fridays locations in Maryland and California exemplify this transition.
Traditionally, empty restaurants would be replaced by other sit-down dining establishments; however, the focus has shifted toward fast-food and fast-casual models that accommodate drive-thru features. Chipotle aims to expand its presence with 4,000 new locations—most equipped with drive-thru lanes—while Chick-fil-A thrives with hopes of establishing new locations featuring four-lane drive-thru setups.
From an economic perspective, drive-thru models tend to be more lucrative than traditional dining options due to smaller footprints and lower staffing needs. The interest from operators who previously focused on casual dining has shifted as the landscape has evolved with the entries of In-N-Out, Whataburger, and Raising Cane’s, companies that were less competitive for this real estate a decade earlier.
Moreover, smaller dining chains, such as Fogo De Chao and First Watch, are seizing opportunities within the vacated spaces. First Watch, for example, has opened 13 restaurants in sites formerly occupied by other restaurants, enjoying impressive sales performance in these locations. As the company continues to scale rapidly, it recently unveiled a new restaurant in Bel Air, Maryland, once home to a Red Lobster, and has plans to develop more than 25 additional sites in similar vacant establishments.
While demand for commercial real estate remains high, supply constraints complicate the landscape. The U.S. retail vacancy rate is at a record low of 4.1%, a stark contrast to past decades characterized by more available space. Prolific issues, including rising borrowing costs and expensive labor and construction requirements, drastically affect the feasibility of new developments, with newly completed constructions hitting a 10-year low recently.
The allure of former restaurants as potential future tenant spaces lies in their standalone nature, attractive for prospective businesses. Located on busy streets with ample parking spaces, these sites are not only convenient but also desirable. A pervasive sentiment among analysts indicates that the extended period without development significantly contributes to the urgent demand currently observed in the market.
In a correction note, an earlier version of this article incorrectly stated the location of a First Watch restaurant, confirming it is indeed situated in Bel Air, Maryland. This serves as a reminder of the ongoing changes and opportunities present in the evolving retail and restaurant landscape today.
