The rent has been paid for small business America, and at a very inopportune time.
Landlords were lenient on rent payments during the first two years of the pandemic. Many are now asking for a rent-back, and some are raising the current rent as well. Meanwhile, most of the government aid programs that helped small businesses get through the pandemic have ended, while inflation has sharply raised the cost of supplies, shipping and labor.
Martin Garcia, owner of the Gramercy Gift Gallery gift and decor store in San Antonio, Texas, survived in part during the first part of the pandemic by paying his landlord what rent he could each month. Then in August 2021, after the federal moratorium on evictions ended, his landlord demanded the full amount of rent he owed.
“I needed $10,000 in 15 days,” Garcia said. He took out whatever loans he could find – often at high interest rates – and barely met the deadline.
A strong holiday season helped him pay off his loans, but so far this year sales are down and he’s using a credit card to pay his June rent. Garcia believes some of his customers are cutting back on non-essentials to afford the higher prices for gas and other must-haves.
Thirty-three percent of all U.S. small businesses were unable to pay their May rent in full and on time, compared with 28 percent in April, according to a survey by Alignable, a small business referral network. And 52% say rent has increased in the past six months.
“A lot of small businesses are still frankly recovering from whatever the last phase of COVID was,” said Chuck Casto, head of corporate communications at Alignable. “Plus they’re dealing with a year of rising inflation on top of that.” It makes it difficult for small businesses to really handle it.”
Ris Lacoste owns an eponymous restaurant, Ris, in Washington, D.C., and gets by on the help he received from the Restaurant Assistance Fund to pay his rent. But the money must be spent by March 2023.
“What I have to do to stay alive after this, every single penny I can save has to go into reserve,” Lacoste said. To cut corners, she repainted tables to cut linen costs, doesn’t print color copies of menus and operates with 22 employees instead of the 50 she had before.
Before the pandemic, the 7,000-square-foot restaurant was often full, but has never “returned to full occupancy,” Rees said. At the same time, inflation increases the cost of doing business.
“Wages are going up, labor is going up, commodity prices are going up, utilities are going up,” Lacoste said. “I wear 20 hats instead of 10 and work six days a week, 12 hours a day.”
But the rent is not something she can control and that adds to the stress.
“You work for the landlord, how long do you want to do this, how long are you going to survive?” she said. “It’s not sustainable.”
The Inflation Dilemma
Data from commercial real estate finance and advisory firm Marcus & Millichap showed that rents rose 4.6% in the first quarter of 2022 compared to the year-ago quarter as the vacancy rate fell to 6. 5%, the lowest level since before 2015. But Daniel Taub, national director of retail at Marcus & Millichap, said inflation would make it harder for landlords to impose rent increases as the consumer begins to feel the squeeze.
“Consumers can spend so much when the dollar isn’t so far away, and retailers can pay so much to carry space and have enough inventory to pay employees,” he said. “It’s a tough retail market and something is going to have to give.”
Charlene Ferguson owns the building that houses the technology business she owns with her husband, Just Call the IT Guy, in Wylie, Texas. She also has 13 tenants, so she sees the dilemma from both a small business and landlord perspective.
During the pandemic, Ferguson agreed with his tenants, who range from a massage therapist to a church, to a rent moratorium. After things started to open up again, she worked with tenants on the back lease. They all caught up within three months – except for the church, whose debts she forgave.
But she has had to raise the rent by about 5% since May to keep up with her own building maintenance costs. Prices went up for utilities and cleaning supplies, as did property taxes. So far, it has not lost any tenants.
“I made enough to cover the increases, I didn’t make more,” she said. “We don’t make a lot of money, but we keep people in business.”
Taking business online
For some small businesses, higher rent is simply not an option. The solution: Go remote.
Alec Poe, CEO of ThePricer.org, an eight-employee credit management consultancy in New York, said his landlord plans to raise the rent by 30 percent when they renew the lease. Pow expected a smaller increase. The landlord said he had a prospective tenant who would take the lease for the full asking price.
So Pow decided to lose the office and let its New York employees work remotely for two months while they looked for cheaper space. The business also has one office in San Francisco and two in Europe.
“We have been in the process of increasing the wages of our employees to counter the rise in inflation,” he said. “Our annual budget didn’t have room for both expenses, so we had to choose one.”