Pictured is a Thuja plicata "Green Giant" that spent too much time in a container. Notice the foliage thinning near the bottom.
As the tree gets into better conditions and starts growing, will the missing foliage be replaced and thicken up here or will it always be noticeable, or should I just replace the tree?
Nearly all conifers except yews do not replace dead foliage or small branches from the trunk or large branches. Arbs will occasionally resprout from the trunk, but this is never particularly good looking foliage and is always extremely slow. Leaf/branchlet loss on a young and small evergreen is not nearly as serious as it is on larger plants, however. This is because that as the tree or shrub grows, its new growth tends to fill in "blank" dead spots over a few years.
You plant should be just fine after it acclimatizes itself to its new location in the ground. In a couple of years you won't be able to tell that it ever had sparse growth.
