The rent owed for small businesses in America came at a very inopportune time.
Landlords were lenient about rent payments during the first two years of the pandemic. Now, many are asking for late rent, and some are raising the current rent as well. Meanwhile, most government aid programs that helped small businesses weather the pandemic have ended, while inflation has skyrocketed the cost of supplies, shipping and labor.
Martin Garcia, owner of the Gramercy Gift Gallery and decorator in San Antonio, Texas, survived the first part of the pandemic in part by paying his landlord’s rent every month. Then in August 2021, after the federal moratorium on evictions expired, the landlord demanded the full amount of rent he owed.
“I needed $10,000 in 15 days,” Garcia said. He took any loans he could find – often at high interest rates – and barely met the deadline.
The strong holiday season helped him pay off his loans, but this year’s sales have so far slumped, and he used credit card financing to pay his June rent. Garcia believes some of his customers are cutting back on unnecessary resources to pay higher prices for gasoline and other must-haves.
Thirty-three percent of all small businesses in the United States were unable to pay their May rent in full and on time, up from 28 percent in April, according to a survey by Alignable, a small business referral network. And 52% said that rent had increased in the past six months.
“A lot of small businesses are still frankly recovering from whatever phase they’ve been in,” said Chuck Casto, Alignable’s head of corporate communications. “Plus, they’re dealing with years of rising inflation on top of that. It’s made it difficult for small businesses to do that.”
Ris Lacoste owns a restaurant of the same name, Ris, in Washington, D.C., and is staying afloat by using the help she got from the Restaurant Relief Fund to pay her rent. But the money must be spent by March 2023.
“What I have to do to survive after that, every penny I can save has to go to the reserve,” Lacoste said. To cut sides, she’s refinishing tables to reduce linen costs, not printing color copies of menus, and working with 22 employees instead of the 50 she had before.
Before the pandemic, the 7,000-square-foot restaurant was often full, but it “never returned to full occupancy,” Reese said. At the same time, inflation worsens the cost of doing business.
“Payroll is up, employment is up, cost of goods is up, utilities are up,” Lacoste said. “I wear 20 hats instead of 10, and I work out six days a week, 12 hours a day.”
But rent isn’t something she can control, and that adds to the stress.
“You work for the owner, how long do you want to do that, how long will you survive?” She said. “It is not sustainable.”
Data from commercial real estate advisory and finance firm Marcus & Millichap shows rent rose 4.6% in the first quarter of 2022 compared to the same quarter last year as the vacancy rate fell to 6.5%, the lowest level since before 2015. But Daniel Taub, Inflation will make it more difficult for landlords to enforce rent increases as the consumer begins to feel upset, said Marcus & Millichap’s national director of retail sales.
“Consumers can only spend so much when the dollar isn’t going away, and retailers can only pay so much to hold space and have enough inventory to pay employees,” he said. “It’s a tough retail market and something has to be delivered.”
Charlene Ferguson owns the building that houses the tech business she co-owns with her husband, Just Call the IT Guy, in Willie, Texas. It also has 13 tenants, so it sees the dilemma from a small business and landlord’s point of view.
During the pandemic, Ferguson and tenants, who range from a massage therapist to church, have agreed to suspend the rent. Once things started looking up, I worked with the tenants on the back lease. They were all collected within three months—except for the church, which forgave its debts.
But it had to increase rent by about 5% starting in May to keep up with its own costs for building maintenance. Prices for utilities and cleaning supplies have risen, plus property taxes. So far, no tenants have been lost.
“I did enough to cover the increases, I no longer do more,” she said. “We don’t make a lot of money, but we keep people in business.”
Take a Business Online
For some small businesses, higher rent is not an option. The solution: go remote.
Alec Bao, CEO of ThePricer.org, a credit management consulting firm with 8 employees in New York, said the landlord planned to increase rent by 30% upon contract renewal. The captives expected a smaller increase. The landlord said they had a potential tenant who would get the lease at the full asking price.
So, Pow decided to lose the office and let his New York employees work remotely for two months while they looked for a cheaper place. The company also has one office in San Francisco and two in Europe.
“We were in the process of increasing the wages of our employees to counter the rise in inflation,” he said. “Our annual budget didn’t have room for both of those expenses, so we had to pick one of them.”