One-third of small businesses couldn’t afford to pay their rent in the last six months. And more than half of renters have seen a commercial rent increase. If you’re wondering how we got here and the ways small business funding can help, that’s where Nav comes in.
This article examines why inflation is hitting the commercial real estate market, how tenants and landlords are both affected, and what you can do if you’re a small business struggling to pay rent.
Why Is Inflation Hitting the Small Business Rent Market?
It’s been two-and-a-half years since the pandemic started. Landlords have been more flexible these past few years if their tenants were unable to pay rent — partially because it was the law. President Joe Biden put a law in place that stopped landlords from evicting their tenants during the pandemic. But in August 2021, the Supreme Court voted to end that law. Landlords were then free to require small business tenants to pay back rent or face eviction.
Additionally, the government aid that kept many small businesses afloat at the start of the pandemic has run out. You can no longer apply for the Paycheck Protection Program (PPP) or Economic Injury Disaster Loans (EIDL).
Tack on the highest economic inflation since 1981 and supply chain issues, and you have a situation ripe for small business rent inflation. Everything costs more, from gas prices to labor to utilities to supplies. Commercial real estate is just another item on the list.
Another possible cause of commercial rent price increases has been around for years. Some commercial leases have a consumer price index (CPI) provision that states that rent will follow the increases to the cost of living (CPI is another way to say inflation). As mentioned, inflation went up significantly from May 2021 to May 2022. So if your lease has a CPI provision, your rent prices could increase alongside the cost of your inventory.
Examining Rent Inflation in the Consumer Lease Market
Residential housing is also affected by rent inflation. The U.S. is in the midst of an affordable housing crisis — and we need to add almost seven million affordable homes and apartments to escape it. On a national level, rent prices have skyrocketed by over 14% in the last 12 months. The Federal Reserve predicts rents to rise another 3.4% in both 2022 and 2023.
All of this adds up to a situation where it’s more expensive to rent an apartment or a home today than it was a year or two ago.
Currently, there is more federal assistance in the residential space than in the commercial space. For example, the national Emergency Rental Assistance Program aims to help families stay in their homes by helping with rent or utility payments.
Tenant and Landlords: Two Sides of the Same Coin
Landlords may not be increasing their costs simply because they want to price gouge their tenants. Instead, they are likely also facing increased costs. Landlords are spending more to maintain their properties for things like cleaning, utilities, and more expensive property taxes.
It also costs an average of $3,500 to evict a tenant for expenses like legal fees, court costs, and lost rent — not to mention lost time. So it makes sense that landlords and small business tenants would want to work together to find a solution.
Some options are:
- Reduce rent prices: If a small business can’t afford the current rent on the lease, it may be worth lowering the monthly price for the remainder of the lease to avoid the headache of an eviction.
- Defer rent: If it’s possible, a tenant and landlord can agree on a later date when the full rent will be paid. This solution could work especially well for seasonal businesses that should be able to afford rent once their busy season arrives.
- Forgive part of the rent: This option is called rent abatement, and it’s when a landlord decides not to charge the tenant for the full cost of rent they owe in exchange for payment of the rest owed.
- Transition to a loan: A landlord can exchange the rent owed into a loan that the tenant makes smaller monthly payments on over time.
- Use the deposit for rent: Since most tenants are required to pay a deposit up-front, a landlord can choose to apply that money to the past-due rent.
- Allow a sublet: If a business can’t pay its rent, landlords can allow the tenant to find a sublet for the entire space or rent out part of the business space to another tenant if there is a high enough occupancy. This eases the burden on the current tenant while allowing the landlord to get paid.
The Worst Places Hit With Business Rent Hikes, Geographically
Rents have increased all across the United States, but many of the metro areas are among the hardest hit. Cities in Florida, like Miami and Orlando, along with Tucson, Arizona, have seen the biggest rent increases in the last year. Other cities that top the list are San Diego, Nashville, New York, and Austin, Texas.
It may come as a surprise because of its notoriously high rent cost, but San Francisco is the slowest-growing metro area in terms of rent prices since the start of the pandemic.
What Can Small Business Owners Do to Ease the Rental Inflation Burden (Besides Going Remote)?
Many small businesses rely on brick and mortar locations or in-person offices to function, so going remote isn’t an option. But if paying your higher rent has become an issue, there may be solutions for you.
First, you can try to work something out with your landlord using one of the options we described above. If that doesn’t work, check with your state or local government to see if there are assistance programs that can help. Local programs may be able to offer emergency assistance so you can pay rent.
You can also seek legal aid from an attorney that can help you to understand or negotiate your current lease or a new lease. Negotiating for a long-term lease may help decrease your monthly payment. There are affordable legal options available online through companies like LegalZoom and RocketLawyer. If you’re based in New York, check out the nonprofit-led Microenterprise Project that can connect you to pro-bono help. Otherwise, look into your state’s bar association for referrals to low-cost attorneys.
Additionally, you may be able to deduct your business’s rental expenses on your taxes. While this doesn’t help you pay your rent immediately, it’s worth keeping in mind for future planning. If you need to end a lease, you may also be able to deduct the associated costs on your taxes.
Finally, consider turning to business funding to increase your business’s access to cash. For your best options, see our guidelines below.
Funding Options for Commercial Real Estate Leases
Small business owners and entrepreneurs can work with lenders to ease the strain they face as they try to manage rent payments each month. Financing can be a fantastic way to help pay your business’s rent as long as you understand the fine print. Some options are:
Each of these options comes with pros and cons, which we explore below to help you decide which type of business funding is right for you.
Small business loans for rent charges
Term loans can help you cover immediate business expenses and are usually flexible enough to be used for rent. These may offer lower interest rates than other options but can be more difficult to qualify for than other options, depending on the lender.
Small business lines of credit to help cover rent
A business line of credit is a pool of money that you can draw from as needed (up to your prescribed credit limit). You only pay interest on what you borrow with a line of credit. So this option can work well during months when you’re behind or if you need to supplement your monthly payment.
Using credit card financing to cover commercial lease payments
You can pay rent using business credit cards, but it’s best to do the math first. Many personal and business credit cards offer extended 0% interest introductory periods, so you might be able to avoid interest when first opening the card. Just make sure you can either pay your bill off in full before interest kicks in or afford the interest payments on top of your balance. You also often have to pay a processing fee when you use a credit card for rent, but your card may offer rewards that offset the charge.
Nav is here to help you find the right small business funding options. Simply create a free account at Nav.com, enter your business details, and see your results instantly.
This article was originally written on July 8, 2022 and updated on February 2, 2023.