What To Expect With Second-Gen Restaurant Space From FAT Brands' Bankruptcy

While FAT Brands has said its brands intend to operate as usual during the restructuring, most observers expect some degree of store rationalization as noteholders and management negotiate a plan. Hendry told listeners he would not be surprised to see the case "generate a lot of second‑generation restaurant space for lease," framing the bankruptcy as part of a broader wave of filings that closed out 2025 and are now spilling into the new year.

What second‑gen space really costs

Second‑generation restaurant boxes are rarely plug‑and‑play, even when they arrive with intact hoods, grease traps and walk‑ins. In many casual dining concepts, branding, bar orientation, kitchen line‑ups and patio configurations are tightly coupled to the prior tenant's operating model and are expensive to rework. In short, the space may be technically second‑gen, but for many credit‑worthy replacement users, it behaves more like a heavy‑capex redevelopment.

For landlords underwriting backfill, the starting point is not simply the original tenant improvement allowance plus some contingency. In a post‑pandemic cost environment, build‑out costs for full‑service restaurant space have risen sharply, driven by labor, materials, mechanical systems and code upgrades.

Insurance premiums and real estate taxes have also climbed, compressing margins and tightening debt‑yield tests at the asset and portfolio level. That means sponsors can no longer assume that re‑tenanting a 5,000‑ to 8,000‑square‑foot box will be a modest capital event bridged by slightly higher rents.

Instead, owners are increasingly modeling two parallel scenarios: a like‑kind casual-dining user that can reuse some infrastructure, and a non‑restaurant user that may require substantial demolition and reconfiguration. Each path carries different capex, downtime and rent profiles. In centers with multiple food‑and‑beverage concepts already in place, converting the box to fitness, medical, service retail or even small‑format entertainment can diversify income but demands a different capital stack and leasing strategy.

Underwriting re‑tenanting in a higher‑cost market

From a capital‑markets perspective, the main question is how to underwrite re‑tenanting risk on assets with meaningful casual-dining exposure as bankruptcies like FAT Brands' work through the system. Hendry has been stressing in other parts of the market that expense creep on such as insurance, taxes, professional services, repairs and maintenance. This has put "significant downward pressure" on net operating income and pushed down debt yields on recent‑vintage loans.

That same pressure applies to restaurant‑anchored centers, where operating costs have outpaced many owners' original pro formas.

For lenders, the response has been tighter proceeds, higher debt‑yield requirements and greater scrutiny of business plans. For equity, it means revisiting assumptions about downtime between tenants, free‑rent periods and percentage‑rent structures, as well as stress‑testing exit cap rates that may be stickier than many expected, even as interest rates rose.

The FAT Brands case, with its combination of high leverage and a sprawling footprint of more than 2,200 locations across 18 brands, underscores how quickly sponsor‑level balance‑sheet issues can cascade into real estate problems for otherwise solid assets.

Stephen Buschbom, head of applied research and Analytics at Trepp and a co‑host of the podcast, has warned in other contexts that seemingly conservative growth assumptions can prove "wildly optimistic" once expense and capex realities are layered in, using case studies from the multifamily side to make that point.

Translating that discipline to retail means treating recurring restaurant capex—kitchen refreshes, façade updates, code‑driven mechanical work—as part of the ongoing yield calculation rather than as an afterthought.

Positioning for the next wave of space

For investors in neighborhood and power centers, the opportunity in the FAT Brands case is not simply to pick up distressed boxes at a discount. It is to set a more realistic template for how casual dining distress will translate into leasable inventory over the next cycle. That includes building a granular view of the specific brands and locations most at risk within the FAT system, understanding franchisee balance sheets and mapping the units' positions within local competitive sets.

It also means getting ahead of the leasing curve. Owners who know which co‑tenants drive traffic, which categories are under‑represented and which concepts have capital and credit to expand will be in a better position to shorten the downtime with negotiated deal structures that reflect today's cost base. As Hendry suggested, investors should avoid assuming that renewed transactional optimism alone will repair underwriting that does not fully account for expense growth and capital needs.

FAT Brands' restructuring will take time to play out, and many stores may never close. But the case is already serving as a reminder that restaurant Chapter 11 is not an abstract credit event—it is a pipeline of second‑generation space whose value will depend on how carefully landlords price the time and capital required to bring those boxes back to life.