Feb 06
The macroeconomic environment hasn’t made matters easy.
Shifts in dining behavior are reshaping restaurant real estate. While top-line sales for many full-service, quick-service and fast-casual brands remain stable, a growing number of once high- performing restaurant spaces are returning to the market and often sitting vacant longer than landlords expected.
There is no single factor driving this trend, instead, a mix of rising operational costs, evolving consumer preferences and shifting real estate economics are forcing both owners and restaurant operators to reassess what makes sense, and what is truly viable in today’s restaurant locations.
Rising Costs Force Lingering Space Availability
Over the last few years, total restaurant operating costs have risen sharply, including labor, food, utilities, insurance and construction expenses.
The National Restaurant Association reported that labor costs have had a significant impact, with many operators facing cost pressures roughly 30 percent higher than pre-pandemic levels. These elevated costs erode margins even when demand remained steady and reshaped expansion decisions.
In markets where vacancies were once rare, such as affluent submarkets with strong daytime foot traffic, larger full-service restaurant spaces are now remaining available far longer. While fast-casual and quick-service concepts have historically been among the first to recover and expand after economic downturns due to their value and convenience, the shifts we are seeing today suggest a broader change in how consumers are engaging with the dinging economy.
Format Conversion, Margin Compression, and Build-Out Costs Rise
One major factor is margin compression: as input costs climb, price increases can only go so far before they begin to affect consumer behavior. Where fast-casual restaurants once served as middle ground between lower-priced quick service and full-service dining, that middle ground is now shrinking as pricing formats converge.
In some cases, customers perceive comparable value in full-service restaurants with higher perceived quality, particularly when the price difference between the two is incremental.
Operators are also grappling with higher buildout and occupancy costs. Large second-generation spaces that were originally designed for large dining rooms or multi-use footprints no longer align with today’s demand. Instead, operators are seeking smaller footprints optimized for delivery, drive-through or carry out. Retrofitting large spaces to accommodate these formats is often expensive, as subdividing sites, reworking kitchen layouts, or upgrading HVAC and plumbing to meet current codes is difficult to justify.
Consumer behavior is also contributing to the issue as many pandemic-era habits have yet to subside. Takeout, curbside pickup and third-party delivery remain elevated, compressing instore sales density and reducing the need for large dining rooms. As a result, operators evaluate whether a space’s square footage supports today’s mix of dine-in and off-premise sales, or if a smaller footprint offers a better return on investment.
The Widening Gap
There is also a widening gap between what landlords hope to achieve and what operators can support when it comes to rent. After years of steady rent escalations in well-located properties, many landlords are finding that this disconnect is contributing to longer vacancy periods as both sides take time to reassess their expectations.
These combined pressures are forcing operators to rethink growth plans and prioritize site quality over quantity. This approach is most evident in high-growth Sun Belt markets with strong population and job growth. However, even in these growth markets, brands remain cautious.
From the landlord perspective, rising vacancies are driving greater creativity in reimagining former restaurant assets. Some landlords are exploring hybrid concepts that combine food with other retail or service uses, while others are offering more flexible lease structures, including shorter terms or built-to-suit arrangements.
An Inflection Point
The rise in vacancies trend is not a rejection of fast-casual, QSR or full-service formats, but a recalibration following a period of intense growth and disruption across the industry. Concepts and operators that adapt to evolving consumer behavior, and prioritize convenience, value and operational flexibility, will be best positioned to succeed. Those that cling to oversized footprints or outdated models are more likely to struggle for traction.
Looking ahead, success will hinge on realistic assessments of cost structures, a clear understanding of where and how today’s diners spend, and a willingness to innovate around space design and deal terms.
Jason Baker is Principal at Houston-based Baker Katz, a full-service commercial real estate brokerage and development firm. To connect with Jason directly, email jbaker@bakerkatz.com.