Sky-High Rents: The New Nemesis for Small Businesses

Small business owners have been navigating turbulent waters over the past three years, pummeled by high prices and a worker shortage that could easily be mistaken for a disappearing act. According to fresh findings from the Bank of America Institute, inflation remains a formidable foe. Particularly concerning is the rent inflation that small businesses are facing, which is outpacing that of U.S. households. Through May, the average monthly share of rent in total payments for small businesses stood at a hefty 9.1%, a stark contrast to the 2019 average of 5.9%. To put it in perspective, individual Americans experienced a 5.3% increase in rent in May.

The situation is particularly dire in the Western U.S., where cities like Las Vegas are feeling the pinch more acutely. In May, the average share of rent there was more than double the national average. The Bank of America report underscores that these rent hikes are driven predominantly by inflation rather than small businesses upgrading their spaces. This is evident in the close tracking of rent payments per client to the nonresidential real estate rents component of the producer price index. The result is a growing number of small businesses struggling to keep up with their rent payments.

A separate study by business networking platform Alignable paints a grim picture: About 43% of small business renters in the U.S. couldn’t pay their rent in full and on time in April. Meanwhile, the National Federation of Independent Businesses (NFIB), a Tennessee-based association catering to small business owners, reported a slight glimmer of hope. Their small business optimism index saw a modest rise in May, reaching its highest level since November 2020. However, that optimism is tempered by the harsh reality of inflation, with about one-quarter of owners citing it as their most pressing issue due to climbing labor costs and higher input prices.

The NFIB’s chief economist, Bill Dunkelberg, noted that for an astonishing 29 consecutive months, small business owners have expressed historically low optimism. Their outlook on future business conditions is at its worst in five decades. The need for relief is palpable as inflation continues to gnaw at Main Street’s lifelines. The latest government data reveals that the consumer price index surged 3.3% in May. Consequently, a quarter of small business owners resorted to raising prices to counteract the high inflation, a figure unchanged from April. Meanwhile, 12% reported lower average selling prices, indicating that not all could pass the increased costs onto customers effectively.

The unrelenting rise in rent and other costs is like navigating a minefield for small business owners. With rent inflation outpacing that of households, it’s no wonder small business optimism is scraping the bottom of the barrel. The West, particularly Las Vegas, is feeling the brunt of the squeeze, signaling that regional disparities are adding another layer of complexity. The message is clear: small businesses need a lifeline, and soon. Without some form of relief, the already fragile optimism among small business owners may completely evaporate, making recovery even more challenging.

Navigating through these challenges requires not just resilience but also innovative solutions from policymakers and business leaders alike. Only then can the backbone of the American economy—the small businesses—hope to regain their footing and thrive once more.