- Rent delinquency among small businesses has increased dramatically during and after the pandemic due to a combination of lower sales and increased rental rates.
- The most badly affected SMBs include those in the education sector, in the automobile and transportation industries, restaurants and retailers.
- To survive the rent crisis, SMBs can negotiate with property owners to establish reasonable rental fees, maximize their working space, diversify their products and services, or explore options like remote and hybrid work arrangements.
- This article is for small and midsize business owners struggling to make ends meet due to rent increases.
The COVID-19 pandemic shook many industries, resulting in faltering economies and businesses that put their services on hold due to high operational costs. As alarming inflation rates ensued, businesses began struggling with higher rent expenditures.
Even though the Federal Reserve has been hiking interest rates to slow inflation, rent prices are still going through the roof and leaving many small businesses out in the cold. We’ll explore the SMB rent crisis in the U.S. and share tips for outlasting and surviving the predicament.
How bad is the SMB rent crisis?
The stats around small business rentals aren’t promising. In 2020, many businesses struggled to pay their rent as money stopped flowing in, which forced them to close their doors. This resulted in a rent delinquency rate — that is, the percentage of renters who fail to pay rent on time — of almost 50 percent. In other words, nearly half of the commercial real estate in the U.S. went unpaid. It almost caused the collapse of over 7 million businesses.
As the worst of the pandemic waned, rent delinquency remained a serious issue. Alignable’s second quarter 2022 rent report revealed that 33 percent of SMBs couldn’t pay their rent for May 2022 — a 5 percent increase from the previous month. Delinquency then dipped in September 2022 to its lowest rate since 2020, but bounced back a full 7 percent in October to sit at almost 40 percent right before winter.
Other pandemic-related business challenges include retaining customers and employees, pivoting to mobile and online transactions, and prioritizing cybersecurity.
Why do small businesses struggle to pay rent?
Small business rent delinquency is a direct consequence of lower sales and increased rental rates.
- Lower sales. At the beginning of the pandemic, the sales crash had an obvious cause. Then in 2022, high inflation caused many businesses to struggle to make ends meet. On top of an already-vulnerable economy, Russia’s invasion of Ukraine made fuel prices spike, which strained consumer spending and directly impacted SMBs’ ability to pay rent.
- Increased rental rates. Increasing rent delinquency created a high-risk environment for commercial property owners; they have increased rental rates to cope with the higher risk. Consequently, over 52 percent of small businesses in the U.S. were subjected to rent increases in the first half of 2020, which took a severe toll on their capacity to cover expenses. Rental rates stayed high: Alignable’s 2022 report revealed that 45 percent of all small businesses in the U.S. paid 50 percent more on their rentals compared to pre-COVID-19 times. Twelve percent of respondents reported rent increases of up to three times the initial value. Rent increases directly correlate to increased delinquency. In fact, the eight cities in the U.S. with the highest rent delinquencies also show higher rental rates than the national average.
However, there is some encouraging news. Some areas are seeing a slowdown in rent delinquency. For example, rent delinquency dropped 8 percent in New Jersey — from 37 percent in April 2022 to 29 percent in May 2022. This demonstrates that while average rent prices and delinquency rates are high, not all cities are feeling the pinch. Improvement may be on the horizon.
Due to inflation, two-thirds of business owners don’t pay themselves in an effort to help cover business expenses.
Which SMBs are most affected by the rent crisis?
While rental delinquency is spread across all types of SMBs, it’s more evident in specific industries. Alignable’s data reveals that in 2022 Q2, restaurants, salons and retailers struggled the most. By October 2022, the education sector faced difficulties as delinquency shot up by 14 percent to reach a total of 57 percent. Delinquency in the restaurant industry jumped from 41 percent in Q2 to 49 percent by October, tying for second place with the automobile industry. This was closely followed by the transportation industry’s 46 percent rental delinquency.
Since the food, retail and automobile industries are all relatively strong contributors to economic growth in the U.S., their struggle to pay rent and/or inability to stay afloat creates a ripple effect that causes the country’s overall economy to falter.
As inflation rates continue to rise and the Fed continues to impose higher interest rates in an attempt to control it, small and midsize businesses are left with the dilemma of finding new ways to survive.
Rent delinquency in Canada
While the situation is dire enough in the U.S., Canada also suffers from the rental delinquency dilemma — and things may be even worse for the northern nation. In the U.S., the average rate of small business rent delinquency is 33 percent, but in Canada it’s an average of 39 percent.
However, some Canadian cities and provinces have shown improvement. For example, in British Columbia, rent delinquency has decreased from 41 percent to 35 percent.
How can SMBs survive the rent crisis?
As rent fees continue to rise, some SMBs are on the verge of closing for good. This is why finding creative ways to survive is crucial. If you’re one of the many SMB owners caught in the rental crisis, here are some tips to remain operational despite the harsh conditions.
1. Negotiate rental rates with your landlord.
Just as it’s critical to communicate with employees and communicate to resolve workplace conflicts, talking to your landlord can be helpful. “If you are having trouble keeping up with your rent payments, you should talk to your landlord about the possibility of negotiating a temporary reduction in rent in order to make ends meet,” advised Steve Pogson, the founder and e-commerce strategy lead of FirstPier.
This strategy requires having a good relationship with your landlord, so it will work best if you already share a bond. Some landlords may be responsive to your needs, while others may see only their bottom line.
Consider the following if you’re thinking about asking your landlord to negotiate your commercial lease:
- Research area rental rates. Gather information about the current rental market in your area. If you understand current market rates for commercial space, you’ll have a better negotiating position.
- Highlight your renting track record. Highlight your business growth, successes and any improvements you’ve made to the property. This can give the landlord confidence in your reliability and ability to care for the property.
- Be flexible about rental negotiations. Consider a longer lease term in exchange for lower rent or other concessions. This can benefit both parties, as a longer-term lease provides stability for the landlord and lower rent helps the business manage costs.
- Seek out rent concessions. Ask for rent concessions, such as a rent reduction or a rent-free period. This can help your business manage cash flow during challenging times.
Remember, negotiation is a two-way process. If you come prepared and are willing to be flexible, you can find a solution that works for you and the property owner.
2. Maximize your office space.
If negotiating rent doesn’t work, consider adjusting your space to produce additional revenue and use it to its maximum potential (all within the boundaries of your lease agreement).
Some businesses have found creative ways to maximize their space, including the following:
- Sublet or rent out unused space. If your business has extra space it’s not using, consider renting or subletting it to other businesses or individuals. This can generate additional income and help offset your rental costs.
- Host events. Hosting events such as workshops, seminars or product launches can generate additional revenue for your business. This can also help build your brand and attract new customers.
- Offer coworking spaces. If you’re renting a larger space, consider offering coworking spaces for remote workers or small businesses. This can generate additional income and provide networking opportunities for your business. Provide amenities such as high-speed internet, printing and scanning services, meeting rooms, and other office-related services.
3. Explore other rent options.
If all else fails, be prepared to walk away and move your business. Other rental options may be available nearby that better suit your needs and budget.
“Consider moving your company to a different location that offers lower rent if the current one is prohibitively expensive for it to continue operating profitably,” advised Mark Linquist, head of marketing at Community Phone. “You might also investigate the possibility of sharing space with another small firm, which will allow you to cut down on your monthly rent expenses.”
Before you move your business, perform a competitive analysis to get a handle on nearby companies with similar offerings in your new location.
4. Diversify your products or services.
Consider finding new, effective ways to diversify your products and services. Depending on what’s trending and suitable for your industry, introducing new products may be an excellent strategy to drive sales and increase revenue while expanding your brand reach.
“To boost your company’s revenue, you might want to think about introducing new goods or services, growing your web presence, or forming strategic alliances with other companies,” suggested Alan Perkins, co-founder of RadialZone. A more diversified portfolio gives your business an edge over the competition and generates more income to help pay higher rent.
5. Go remote or implement a hybrid work setup.
The most effective way to tackle the rent crisis as an SMB is to forgo renting altogether. Cash-strapped businesses can consider transitioning to a fully online, remote setup to strip the business of any rent-related expense completely.
While managing a fully remote workforce only works for some types of SMBs, many businesses can accommodate a hybrid work setup where employees only report to the office on specific days.
SMBs can navigate and survive the rent crisis
The pandemic led to long-term high inflation rates and rent prices, which caused financial challenges for small businesses. Many businesses are struggling to pay their rent and risk going under. In a vicious cycle, increased rent delinquency makes it difficult for landlords to maintain their properties. As a result, they increase rental rates, which makes it even more challenging for small businesses to cover expenses.
However, SMBs can find ways to survive and even thrive amid the rent crisis by negotiating rates, maximizing their space, and diversifying their operations. Opting for a remote or hybrid work setup is another option to reduce or even eliminate rent as a business cost.