The Main Street rental crisis just took a turn for the worse

The Main Street rental crisis just took a turn for the worse

Federal Reserve Chair Jerome Powell said Friday that the central bank’s fight against inflation will bring “pain” to the economy, and right now small businesses are feeling that pain on both sides of the fight.

Inflation has been a top concern for small businesses for some time, as high prices for commodities, labor, energy and transportation squeeze margins. Higher rents and landlords feeling more aggressive as the nation moves further from the peak of Covid have compounded the impact of inflation on Main Street. While there are some signs of slowing inflation across the economy, that’s because the Fed is deliberately cooling demand, and that’s led small business owners to expect a drop in sales.

What does it all matter? According to a new national survey of small business owners by Alignable, August saw a large increase in the percentage of small business owners who couldn’t pay their full rent in August.

Nationwide, the sharp rise in rental prices for apartments is one of the inflation indicators that may have recently peaked. But the Alignable data shows that the rental inflation crisis for small businesses is actually getting worse. 40 percent of small businesses said they would not be able to pay their rent in full this month, up 6% month-on-month and a record for 2022.

“I’ve been following this closely every month since March 2020 and have been shocked,” said Chuck Casto, director of research and communications at Alignable.

The percentage of small business owners who can’t pay rent hasn’t been this high since March 2021. “That’s a number we would have expected in the middle of the pandemic when a third of establishments were closed and everyone was wearing masks or not going to restaurants,” Casto said.

Alignable’s survey was conducted August 13-22 among 7,331 randomly selected small business owners.

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The small business rental crisis could turn the holiday quarter of the year, always the most important for consumer-focused Main Street entrepreneurs, into a survival one.

It’s not news that inflation has become a much bigger problem than Covid on Main Street, but until it “and significantly eases off,” Casto said, all the small business costs add up to another existential crisis for Main Street , which is highlighted by worries about the rent.

45% of small business owners surveyed by Alignable say they pay at least 50% more rent than they did before Covid. 24 percent say their landlords have doubled the rent; 12% say they are now paying three times more.

Back to peak Covid worries for company survival

The Alignable data also shows that many small businesses are still struggling to regain pre-Covid sales levels while the Fed takes steps to slow aggregate demand. Casto said Alignable would hope numbers would trend down among small business owners who say they haven’t returned to pre-Covid sales brands, but that’s not happening now. Last December, amid the critical holiday season for many small businesses, 43% said they were “completely back,” according to Alignable. “Now it’s 23 percent,” Casto said, “and it just slipped.

According to Alignable, this is the worst level in over a year.

The Alignable data aligns sentiment with the recent CNBC|SurveyMonkey Small Business Survey, which showed small business confidence has hit an all-time low. And Casto says rental data is crucial because it gives a complete picture of what’s going on with small business finances.

Alignable asks small businesses whether inflationary pressures, including increased rents, could threaten their ability to stay open over the next six months, and while that data point hasn’t changed much in August, it remains uncomfortably high at around 47% to 48%. Of these, 20% are “very worried”.

In the spring it was still 28%.

Casto said this is the key number he will be monitoring in the coming months, alongside rent-payability data.

“A lot of them still haven’t recovered from Covid and then you add inflation and then, whether you consider this a recession or not, we have an economic slowdown and a fall in consumer spending,” he said.

The CNBC Business Survey found that expectations of lower sales were the biggest contributor to the quarterly decline in confidence, and many small business owners believe the recession has already begun.

“We’re definitely seeing activity and customer numbers in stores dropping off,” Casto said. The inability to return to pre-Covid sales in terms of monthly revenue generated does not even take into account the additional costs posed by inflation and a slowing economy. “It’s a combination of everything … everything builds on itself,” he added.

to examine real estate options

It’s not all bad news on Main Street. Some recent measures are making many small businesses, particularly in the services sector, better off and benefiting from the shift in consumer behavior from goods to services purchases. That’s according to Intuit’s data, and small businesses are the biggest businesses. But Alignable data on rent shows that the impact of inflation remains widespread across all sectors of the small business economy, even if some sectors are being hit harder and faster than others. In real estate, 40% of small businesses said they could not pay rent in August, up from 18% in December last year.

“There aren’t many storefronts anymore, even in fancy cities,” Casto said. “We’re not quite on the level of a ghost town, but we’re concerned. … We’re on another level of ‘pay rent or not pay’. … It’s a much bigger problem.”

There are options for small businesses facing a rental crisis. Negotiations are being made with landlords, although this is becoming increasingly difficult as we move further from the peak of Covid.

“Landlords feel like they let it slide for a year and a half and did everything they could, but now, two years down the drain, they have to start asking for money,” Casto said. “Because they could lose their buildings, they pay mortgages.”

Comments Alignable receives from small business owners surveyed indicate that more and more are afraid to ask landlords for even more rent reductions at this time, and landlords’ patience is waning after the last two years. However, the survey also shows that many landlords still prefer a tenant to make a good faith effort to pay rent and catch up on overdue rents than to be faced with empty storefronts during the economic slowdown.

“Sometimes these landlords are happy that the apartment is occupied, even if they only get part of the rent, it’s better than not getting any of it,” Casto said.

For business-to-business owners, he recommends at least considering the option of working entirely remotely and taking that overhead from real estate and applying it to other areas of the business. This is a move that Alignable says more B2B owners are making based on the comments they’re getting with the survey data.

The situation makes the fourth quarter, always the most critical for B2C small businesses, for which rent is now the #1 or #2 issue, even more important this year. Small businesses always expect the holiday sale to be the biggest sales period of the year, and this year is no different, but for many businesses it’s just escalating into an all-or-nothing.

As the Fed seeks a “soft landing” for an economy it says has yet to enter recession, there’s a chance a further lower inflation path will mean lower costs for small businesses across the board and a potential balance point for Main Street could be achieved between a lesser margin collapse and the lower sales that come with a weaker economy. Small businesses have adapted in recent years, changing during the pandemic, taking on part-time jobs to keep their finances working (sometimes more than one), and in some cases retiring earlier than expected (those numbers have also risen ). But if there’s a soft landing for Main Street, it probably won’t be apparent until after the end of this year.

“We’ve heard from small companies that they are counting on Q4,” Casto said. “Q4 is going to be really meaningful and if those numbers don’t improve in Q4 I don’t even want to say what might happen based on what I see. … Hopefully it will be a ‘make it’ situation for most.”