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.
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.
Small business rent delinquency is a direct consequence of lower sales and increased rental rates.
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.
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.
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.
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.
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:
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.
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:
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.”
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.
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.