Federal Reserve Chairman Jerome Powell said Friday that there will be “pain” in the economy as a result of the central bank’s battle with inflation, and right now, small businesses are experiencing that pain on both sides of the battle.
Inflation was first. 1 Small businesses worried for some time, as higher prices for raw materials, labour, energy and transportation slashed profit margins. Rising rents and landlords feeling more aggressive the farther the nation moves away from the peak of Covid, has exacerbated the blow from inflation being felt on Main Street. While there are some signs of inflation easing across the economy, this is because the Federal Reserve is intentionally lowering demand, and this is causing small business owners to expect a drop in sales.
What does it all add up to? According to a new national survey of small business owners conducted by Alignable, August saw a significant jump in the percentage of small business owners who were unable to pay their full rent in August.
Nationwide, apartment rents, which have skyrocketed, are among the indicators of inflation that may have peaked recently. But Alignable’s data shows that the rent inflation crisis for small businesses is actually getting worse. Forty percent of small businesses said they could not pay their rent in full this month, up 6 percent month-on-month and setting a record for 2022.
“I’ve been following this closely every month since March 2020, and I’ve been shocked,” said Chuck Casto, Head of Research and Communications at Alignable.
The percentage of small business owners who are unable to rent has not been this high since March 2021. “This is a number we were expecting in the middle of the pandemic, when a third of places were closed, everyone was wearing masks or not going to restaurants.”
The Alignable survey was conducted from August 13 to August 22 among 7,331 randomly selected small business owners.
The small business rental crisis could make the holiday quarter, always the most important for consumer-facing Main Street entrepreneurs, and critical to survival.
It’s not new that inflation has become a much bigger concern than Covid in Main Street, Casto said, but that until it eases “and goes down significantly,” all small business costs add to another existential crisis on Main Street, highlighted by rent concerns.
Forty-five percent of small business owners surveyed by Alignable said they pay at least 50% more in rent than they were paying before Covid. 24 percent say landlords have doubled rent; 12% say they are now paying 3 times more.
Back to peak Covid concerns about business survival
Alignable’s data also shows that many small businesses are still struggling to return to pre-Covid revenue levels, just as the Federal Reserve is taking steps to slow aggregate demand. Casto said Alignable is hoping the numbers will trend downward among small business owners who say they are not back to pre-Covid sales signs, but that hasn’t happened now. Last December, amid the critical holiday season for many small businesses, 43% said they were “completely back,” according to Alignable. “It’s 23% now, and it’s just slipped away…Even the people who thought they were out of the woods in December or January, all of a sudden they aren’t back,” Casto said.
This is the worst this indicator has seen in over a year, according to Alignable.
Alignable data matches CNBC | . poll The recent Small Business SurveyMonkey is in the mood, which showed that small business confidence is at an all-time low. The rental data is important, Casto says, because it tells us the full picture of what’s going on in the finances of small businesses.
Alignable asks small businesses if inflationary pressures including rent increases could jeopardize their ability to stay open over the next six months, and while this data point was unchanged significantly in August, it remains uncomfortably high, at about 47%-48%. Of those, 20% are “extremely concerned”.
Until spring, that number was as low as 28%.
This is the main figure he will see in the coming months, Casto said, along with data on ability to pay rent.
“A lot of them haven’t recovered from Covid yet, and then there’s inflation on top of it, and then, whether you consider this a recession or not, we have an economic slowdown and consumer spending is going down,” he said.
CNBC’s survey of small businesses found lower sales expectations were the largest contributor to the quarterly drop in confidence, and many small business owners believe the recession has already begun.
“We definitely see things going down in terms of activity and number of customers in stores,” Casto said. The inability to return to pre-Covid sales in terms of monthly revenue generated does not take into account the additional expenditures brought about by inflation and a slowing economy. “It’s a mixture of everything…everything builds on itself,” he added.
Real estate options to consider
Not all news is bad on Main Street. By some recent metrics, many small businesses in the service sector, in particular, are doing better and benefiting from a shift in consumer behavior from buying goods to buying services. That’s what Intuit data shows, and small business is its biggest business area. But consistent data on rents shows that the impact of inflation remains widespread across sectors of the small business economy, even with some sectors being hit harder and faster than others. And in the real estate sector, 40% of small businesses said they were unable to rent in August, compared to 18% last December.
“A lot of storefronts, even in fancy cities, don’t even exist anymore,” Casto said. “We’re not quite at the ghost town level, but we’re concerned…we’re at another level of ‘paying rent or not paying rent’…it’s a much bigger problem.”
There are options for small businesses facing a rental crisis. Someone is negotiating with landlords, although that gets harder the further away we get from the peak of Covid.
“Landlords feel like they let it slide for a year and a half and did everything they could, but now, two years in the hole, they have to start asking for money,” Casto said. “Because they might lose their buildings, they’re paying off mortgages.”
Comments Alignable is receiving from small business owners surveyed show that more people are afraid of landlords asking at this point for more rent forgiveness, and that the owner’s patience after the past two years is running out. But the survey also indicates that many landlords still prefer a tenant to make a good faith effort to pay rent, and offset any late rent, rather than face an empty storefront during the economic downturn.
“Sometimes these landlords are happy to fill the place even if it’s just getting a portion of the rent, it’s better than not getting any,” Casto said.
For a business to business owners, he recommends at least looking at the ability to relocate completely, take these real estate overheads and apply them to other areas of the business. This is a move that Alignable says more B2B owners are taking, according to feedback it receives with survey data.
The situation makes the fourth quarter, always the most important for small B2C businesses, for which rent is now number one. 1 or not. Number 2, more important this year. Small businesses have always counted on holiday sales to be the biggest sales period of the year, and this is no different this year, but only escalated to the success or failure of many businesses.
As the Fed seeks a “soft landing” for an economy it says hasn’t entered a recession, there’s a chance that if the inflation trajectory continues to fall, that will mean lower costs across the board for small businesses, and a potential equilibrium point for Main Street can be reached between a hit The smaller the margins and the lower sales that would come with a weaker economy. Small businesses have been adjusting over the past few years, pivoting during the pandemic, taking side errands to get their finances working (sometimes more than one) and, in some cases, retiring earlier than expected (these numbers are also high). But if there is a slight subsidence on Main Street, it is not likely to be evident until after the end of this year.
“We’ve heard from smaller companies that they are counting on Q4,” Casto said. “The fourth question is going to really tell us, and if those numbers don’t improve in the fourth quarter, I don’t even want to say what could happen based on what I see. … I hope it’s a ‘make it’ situation for most of them.”