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

New York (CNN) — In Woodbridge, Virginia, LongHorn Steakhouse will take over an old TGI Fridays. In Watertown, New, York, a former Red Lobster is being converted to a Northern Credit Union bank. And Chick-fil-A is taking over a shuttered Red Lobster in Naples, Florida.

Vacant restaurant chains are creating prime real estate for a wide range of companies looking for spots to grow, especially fast-food chains that want to install drive-thru lanes on spots where diners once sat down for dinner.

Chains like Red Lobster and TGI Fridays filed for bankruptcy this year and closed more than 175 restaurants combined. 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 cater to low- and middle-income customers, and the chains have also been struggling because their customers are squeezed. Diners are opting to eat at home or at cheaper fast-food and fast-casual chains such as Chick-fil-A and Chipotle, which can be more profitable to run than sit-down table service.

“Family dining has had it the worst post-pandemic,” Denny’s CEO Kelli Valade said on an earnings call last month. Customer traffic to full-service restaurants like Denny’s has dropped 0.5% so far this year, while it has increased 3.2% at fast-casual restaurants and 0.6% at fast-food restaurants, according to data from Placer.ai.

But these sit-down restaurants aren’t staying empty for long. In many cases, landlords are eager to replace the aging chains because they can find new tenants that pay higher rents and draw in more customers.

“This is not an ‘oh my God’ kind of moment. This is completely expected,” said Jeff Kreshek, a senior vice president at Federal Realty, which owns one vacant Red Lobster property in Maryland and two TGI Fridays real estate locations that remain open in Maryland and California. “I look at this as an opportunity. It’s real estate that hasn’t been available to the broader market in 20, 30 years.”

Replaced by the drive-thru

In the past, these restaurants would often be replaced by a different restaurant chain, with tables to sit at and servers to bring out the food. But now, fast-food and fast-casual chains are taking these spaces and building more drive-thru lanes. Chipotle is building 4,000 new locations, the majority with drive-thru lanes, while Chick-fil-A is building new spots with four-lane drive thrus.

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

“A lot of former casual dining operators who go out are being taken by In-N-Out, Whataburger, Chick-fil-A and Raising Cane’s that really weren’t competing for that real estate 10 years ago,” said Matt Mandel, a senior vice president at CBRE who specializes in retail and restaurants.

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

First Watch has opened 13 restaurants at sites formerly occupied by other restaurants, and they are some of the best-performing locations across the company, CEO Chris Tomasso said on an earnings call Thursday.

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

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

Why vacant restaurants are prime real estate

It’s not easy finding vacant space or building a new restaurant from the ground up right now.

Demand is high for vacant space around the United States and supply is tight. The US retail vacancy rate is at 4.1%, the lowest rate in decades. Years of little construction, as well as higher borrowing, labor and construction costs have restricted supply. Finished construction last quarter hit its lowest amount in more than 10 years, according to commercial real estate firm CBRE.

Many of these restaurant locations are also attractive to prospective tenants, as they are freestanding buildings, not located in the back of decaying indoor malls. 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 stores in malls as online shopping has grown to around 16% of retail sales. Real estate research firm Green Street estimates about 150 enclosed malls have closed since 2008, leaving about 900 today.

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

“There’s a lot of demand,” said Mandel. “A lot of it comes down to the lack of development over the past five to 10 years.”

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Correction: A previous version of this article misstated the location of a First Watch restaurant. It is located in Bel Air, Maryland.