Soaring Rents: A New Nemesis for Small Businesses

Small businesses in the United States have faced a trifecta of tribulations over the past three years: high prices, worker shortages, and relentless inflation. According to recent findings by the Bank of America Institute, the situation remains dire for many entrepreneurs. Particularly concerning is the issue of rent inflation, which appears to be outpacing the rate experienced by individual households. For small businesses, the average monthly share of rent in total payments through May has soared to 9.1%, a significant leap from the 2019 average of 5.9%. In stark contrast, rent for individual Americans rose by a more modest 5.3% in May.

The West Coast, and cities like Las Vegas in particular, are bearing the brunt of this increase. In these areas, the average share of rent in May was more than double the national average, underscoring the regional disparities in this economic strain. Business owners are quick to point out that these increases are not due to moves to larger or more luxurious spaces. According to the Bank of America report, rent payments closely follow the nonresidential real estate rents component of the producer price index, indicating that inflation is the main culprit.

A separate study by business networking platform Alignable sheds light on the dire consequences of these rising rents. It found that approximately 43% of small business renters in the U.S. were unable to pay their rent in full and on time in April. The struggle to keep up with rent payments is becoming increasingly common, putting many small businesses on precarious financial footing. This situation is exacerbated by the broader challenges small businesses are facing, such as high input costs and labor shortages.

Interestingly, despite these challenges, some small business owners maintain a glimmer of optimism. The National Federation of Independent Businesses (NFIB) reported that its small business optimism index rose in May to the highest level since November 2020. However, this optimism is tempered by the harsh realities of inflation. About one-quarter of NFIB members identified inflation as the most pressing issue in their business operations. Labor costs and high input prices continue to squeeze profit margins, making it difficult for owners to stay afloat.

Bill Dunkelberg, the NFIB’s chief economist, highlighted the ongoing struggles of small business owners, noting that their outlook on future business conditions remains at a 50-year low. The latest government data shows that the consumer price index jumped 3.3% in May, adding more fuel to the inflationary fire. As a result, around 25% of small business owners have reported raising prices to mitigate the impact of high inflation, while 12% have reported lower average selling prices.

The challenges facing small business owners are multifaceted and deeply intertwined with broader economic trends. While there may be occasional glimmers of hope, the prevailing sentiment is one of caution and concern. As these entrepreneurs navigate the turbulent waters of high rents, labor shortages, and inflation, the need for relief and support becomes increasingly urgent. The resilience and adaptability of small business owners will undoubtedly be tested in the months and years to come.