How does lack of housing cause high rents for restaurants?
It's largely driven by the city's height limits-- there are only so many square feet of usable housing you can fit within a given volume of space.
In other cities where I've lived, when a restaurant loses a lease in this manner, it's because the landlord has lined up a different tenant which they consider much higher value.
Think about it this way: if more high-rise apartments were built, then some rowhouses (or other inefficient [in terms of people per square foot of land] housing) could be torn down. Restaurants could be built in their places.
Thus the supply of restaurant space would increase, and the average price would accordingly decrease.
Blah blah blah. This isn't Econ 101. We have zoning laws, so no, all space is not the same.
I haven't checked, but I'm fairly certain that the Grove's location isn't zoned for residential use. In any case, I can guarantee that isn't what the owners are planning to do with the space, given its prime location on a high-foot-traffic, retail strip.
One more thing... you may have misinterpreted my comment. The situation I'm imagining is not the case where The Grove is turned into a residential development. It's the opposite — some residential areas are razed and rezoned for business, driving down The Grove's rent.