Red Lobster and TGI Fridays are closing. Here’s what’s moving

Chains like Red Lobster and TGI Fridays filed for bankruptcy this year and collectively closed more than 175 restaurants. Red Lobster was driven into bankruptcy by mismanagement under a previous owner, global shrimp supplier Thai Union, while TGI Fridays fell under private equity owner TriArtisan Capital Advisors. Denny’s is also closing 150 restaurants.

All three typically target low- and middle-income customers, and the chains are also struggling because their customers are under pressure. Diners are choosing to eat at home or at cheaper fast food and fast casual chains like Chick-fil-A and Chipotle, whose operations may be more profitable than table service.

“Family dining has taken the worst hit since the pandemic,” Denny’s CEO Kelli Valade said on an earnings call last month. According to data from Placer.ai, customer traffic at full-service restaurants like Denny’s is down 0.5% so far this year, while it’s down 3.2% at fast-casual restaurants and 0 at fast-food restaurants .6% increased.

But these sit-down restaurants don’t stay empty for long. In many cases, landlords are eager to replace aging chains because they can find new tenants who will pay higher rents and attract more customers.

“This isn’t an ‘Oh my God’ moment. That’s absolutely to be expected,” said Jeff Kreshek, senior vice president at Federal Realty, which owns a vacant Red Lobster property in Maryland and two TGI Fridays real estate locations still open in Maryland and California. “I see this as an opportunity. These are properties that have not been available to the general market for 20, 30 years.”

In the past, these restaurants were often replaced by another chain of restaurants, with tables to sit at and waiters to bring out the food. But now fast-food and fast-casual chains are taking over those spaces and building more drive-thru lanes. Chipotle is building 4,000 new locations, most with drive-through lanes, while Chick-fil-A is building new locations with four-lane drive-through lanes.

Drive-thru restaurants are in many cases more profitable than sit-down restaurants because they are smaller and require less staff and maintenance to operate.

“A lot of former casual dining operators that are going out are being acquired by In-N-Out, Whataburger, Chick-fil-A and Raising Cane’s, which really didn’t compete for this property 10 years ago,” said Matt Mandel, a senior Vice President at CBRE specializing in retail and restaurants.

Smaller restaurant chains, such as Brazilian steakhouse chain Fogo De Chao and First Watch, a breakfast chain, are also expanding, according to NorthMarq, a commercial real estate firm.

First Watch has opened 13 restaurants in locations formerly occupied by other restaurants, and they are among the best-performing locations across the company, CEO Chris Tomasso said in an earnings conference call Thursday.

In October, First Watch opened a restaurant in Bel Air, Maryland, in a space previously occupied by a Red Lobster. At 8,000 square meters, it is the largest First Watch. In March, the company opened a restaurant in Franconia, Virginia, previously occupied by a TGIFridays.

First Watch plans to open more than 25 new locations in vacant restaurants, Tomasso said.

It’s not easy to find free space or build a new restaurant from scratch right now.

Demand for vacant space in the United States is high and supply is tight. The U.S. retail vacancy rate is 4.1%, the lowest level in decades. Years of low construction activity as well as higher credit, labor and construction costs have limited supply. According to commercial real estate firm CBRE, completed construction last quarter reached its lowest level in more than a decade.

Many of these restaurant locations are also attractive to potential tenants because they are freestanding buildings that are not behind run-down shopping centers. Indoor malls have struggled in recent years, and mall vacancies reached 6.5% last quarter, according to CBRE. Macy’s, JCPenney, Nordstrom and others have closed hundreds of their mall stores as online shopping has grown to around 16% of retail sales. Real estate research firm Green Street estimates that about 150 enclosed malls have closed since 2008, with about 900 remaining today.

Most of the closed restaurants are also located on busy streets with large parking lots or adjacent to a shopping center, making them attractive locations.

“The demand is great,” said Mandel. “A lot of this is due to the lack of development over the last five to 10 years.”

Correction: An earlier version of this article incorrectly stated the location of a First Watch restaurant. It is located in Bel Air, Maryland.