Shifts in the places customers choose for eating out or ordering food means many chains may face a choice of adapt or die — with significant impacts for CRE.
Sources cited in a paper by Trepp analyst Vivek Denkanikotte contended that “restaurant chains and operators this year are on track to declare the most bankruptcies in decades outside of 2020.” The result, he added, is that suburban retail centers are finding it more difficult to secure restaurant tenants with strong credits.
Among the most recent bankruptcies is TGI Fridays, which filed for Chapter 11 on November 2. The chain saw its sales fall 15% to $728 million in 2023 compared to the prior year. Its franchisees were not included in the bankruptcy procedure. The struggles followed another significant bankruptcy — Red Lobster, which filed for Chapter 11 on May 19.
Although Trepp noted that overall sales in dollars at the 16,880 locations of the top 500 chains in the U.S. rose 4.7% year-over-year in 2023, it pointed out that the increase was mostly due to higher menu prices as customer traffic fell by 1.6%.
As an example of the problems chains are facing, Trepp pointed to Denny’s. The diner-style restaurant is not in bankruptcy but it has announced that it will close 150 stores in the coming year, and no longer will operate around the clock. Additionally, it will slash its menu offerings by more than half. “The large and growing number of closures reveals a deeper problem for many of the classic casual dining chains, which are struggling to compete with… ‘limited-service restaurants’ including fast food and fast casual in a rapidly evolving market,” Trepp said.
Not all chains are in the same position. Texas Roadhouse and brands in the Darden Restaurants group are among the exceptions.
Experts say the restaurants that are failing have not kept up with the times and changing consumer preferences. “It’s not just about the food anymore – it’s about the ambiance, the atmosphere and the social aspect of dining,” one noted. Consumers increasingly demand either convenience or a unique dining experience that the established chains no longer provide, Trepp said. Fast casual chains like Chipotle, Cava and similar eateries that offer quick, convenient and customizable service are benefiting.
Trepp pointed to statistics on the market capitalizations of different chains. Denny’s, which had a market cap of $1.13 billion in 2019 is now just $327.99 million. TGI Fridays market cap fell in the same period from $59.5 million to $2.45 million. In contrast, Chipotle’s market cap of $23.3 billion in 2019 soared to $79.29 billion in 2024, while Shake Shack’s more than doubled from $2.23 billion to $5.69 billion.
“With fewer private-equity firms willing to take bets on restaurants and banks more cautious on the sector, some chains will likely shrink or scale back the number of markets they serve,” Morgan McClure, managing director for Fortress Investment Group, which leads the ownership group that purchased the recently bankrupt Red Lobster, told The Wall Street Journal.
The impact on CRE is significant. “As casual dining chains close their doors across the nation, many landlords are left with large, vacant spaces that may not be easily filled by other tenants or require expensive custom buildouts,” Trepp noted, adding that landlords in the future will have to modify both their marketing and underwriting practice.
Neighborhood centers are most likely to bear the brunt of hard times. The report noted that more than one in three TGI Fridays and nearly two in three Denny’s and Red Lobsters are in a neighborhood center. “For the commercial real estate industry, this could mean that properties traditionally seen as reliable retail anchors might not hold the same appeal as they once did,” it commented.
“The standard for service, even if not traditional sit-down waiting service, is very high as consumers can use mobile apps to discover restaurants near them, read reviews, and pre-screen menus before even selecting a dining establishment. Chains that focus on creating a pleasant, convenient, and/or memorable experience for diners are more likely to thrive in the years to come,” the report concluded.