High Rents Are Pressuring Small Businesses
The National Federation of Independent Business has been tracking the optimism of small businesses for years. They said the result in June 2024 was the highest reading of the year to date. But they also noted that this was the 30th month below the historical average.
In short, 2024's small business optimism is at the level you'd have found right after the Global Financial Crisis, a time of understandable massive pessimism.
The Bank of America Institute used internal data to analyze small businesses and what might be driving their reactions. Thinking, reasonably, that profits likely correlate to business attitudes, they looked at the ratio of inflows to outflows, which they saw as a good proxy for profits. It reached its highest point since March 2023. But it was still lower than the average over the last few years, and that includes some bad stretches during the pandemic.
They grew in May, but cost pressures dampened them. There were higher input prices and labor costs. And then there is overhead. According to Bank of America, year-over-year monthly rent payment growth for the average small business client was 12%. They also saw a close correlation between the rent payments and the nonresidential real estate rents component of the Producer Price Index. That suggesting that, rather than expanding or moving to larger spaces, it was inflation that drove rent costs up. And the increase has been at a rate higher than what households have experienced.
Another measure was the share that rent represented of total payments. In May 2024, it was 9.1%, the highest since 2019, when it was 5.9%. There has been proportionate inflation that hasn't subsided, which also makes sense. Unless there is a period of disinflation, the increases remain accrued.
Commercial rent increases for small businesses weren't evenly distributed across the country. Three out of the top five Las Vegas, San Diego, and San Francisco were in the West. Washington, D.C. and Chicago were numbers two and five respectively. Bank of America said that cities in the South tended to have lower average shares.
Out of the top 20 metros Las Vegas; Washington, D.C.; San Diego; San Francisco; Chicago; Los Angeles; New York; Kansas City; Seattle; Nashville; San Antonio; Houston; Boston; Atlanta; Miami; Dallas; Orlando; Austin; Tampa; and Charlotte all but Dallas saw growth in the three-month moving average rent share over the previous year. San Antonio, Kansas City, New York, Nashville, and Orlando saw a 20% increase.
"And for those cities whose average share is above the national average and growing, it could mean continued pressures for small businesses in those areas, and, subsequently, broader ramifications for those local economies as a whole," they wrote.
Source: GlobeSt/ALM