"The restaurant next to us is good."
The sentence is about the next door restaurant (となりのレストラン), not about sth being next to the restaurant (レストランのとなりにいえがあります, the house is next to the restaurant).
The literaly translation sounds awkward in english but normal in Japanese
の is possesive, you're talking about the restaurant's "beside". Even if that doesn't make sense in english, that's how it is in Japabese!
"Yoko" also means next to right?? Can it not be used In this context instead of "Tonari"???
From that link I don't understand why "tonari" can be used? It says that things should be of the same type or "caliber" for tonari. How is a person and a restaurant of the same type?
Perhaps because the "us" component represents the building in which "we" live? This is analogous to a person pointing to his/her house and saying "this is me," wherein "me" takes the place of my home.
It marked me wrong for using よこのレストラン but となり was not even an available option in the word bank.
I do not get the use of "no" here. I guess it is not possessive, but I'm not sure why it doesn't mean "next to the restaurant". Would that be the other way around, i.e. "restoran no tonari"?
In the structure AのB, B is a property possessed by or related to A.
レストランのとなり means "the space next to the restaurant." Or "relative to the restaurant, the space next to it."
となりのレストラン means "the restaurant that is in the space beside (us)" or "relative to the space beside (us), the restaurant (that occupies it)." (The "us" being inferred from context.)
It is still possessive, it's just that it can be used in situations that when translated to English don't sound naturally like something that can possess anything.