High rents are forcing small businesses in into tough choices
"Every time the rent goes up, we have to raise prices, to keep up with the cost," said Adelita Valentine, owner of HairFreek Barbers in Los Angeles. "But with the cost of living, it makes it difficult on our customers."
Other owners are choosing to be late on payments or seeking out new locations where the rent is lower. A few are pushing back against their landlord.
Although inflation is easing, it remains a top concern for small businesses. According to Bank of America internal data, rent payments per small business client rose 11% year-over-year in July. That's more than twice the increase for renting and owning a residence, a metric known as shelter, according to the government's monthly Consumer Price Index. That figure rose 5.1% in July.
And although the situation has improved since the height of the pandemic, a survey by business networking platform Alignable of more than 6,000 small business owners found that 41% could not pay their July rent on time and in full. And 52% said they've encountered rent spikes in the past six months.
The rent for Valentine's barbershop rose to $4,000 in January from $3,600 in December, the fifth increase in the past eight years. She had to raise the price for her cuts from $35 to $40.
Two months ago, she moved locations for a cheaper $3,200 rent, but her space is smaller now and she sees fewer families coming in.
"A lot of people can't afford to take a whole family to get haircuts," after the price increase, she said.
Peter Yu has owned iPAC Automotive, an auto repair and detailing shop in Ontario, Canada, for six years. He said the rent on the shop typically went up about 4% a year. But when his landlord sold the property to a new owner, Yu's rent jumped from about $1,800 (2,500 Canadian dollars) to about $2,700 (3,700 Canadian dollars) after three months.
He contemplated moving but decided that the cost of a move would be more than just paying the extra rent.
Yu tried to raise prices a month ago, but customers would come in and say "Oh, its too expensive," and leave, he said. So, he had to drop the price increase in order to get those customers back.
"When we do try to raise our prices, consumers don't have the money to pay for it. They're looking for financing options," he said. Yu's services run the gamut from paint correction that costs a few hundred dollars to troubleshooting problematic EV battery and electric drive units for out-of-warranty Teslas that can cost up to $15,000.
So instead, he's going to try to improve his marketing, close more sales, and find a way to offer more financing.
Standing firm against a landlord sometimes works. Janna Rodriguez has run her home-based The Innovative Daycare Corp. in Freeport, New York, since 2018. When she first signed her lease, she paid $3,500, plus costs including landscaping and maintenance. In 2020, the pandemic began, and her landlord raised her rent to $3,800 and also made her start paying half of the homeowner's insurance. Last year, the landlord raised her rent to $4,100, plus the additional expenses.
Rodriguez raised her prices for the first time, by $10 per child per week, to help offset the rising rent.
This year she successfully pushed back when the landlord wanted to raise the rent yet again.
"I said to them, if you do that, then I'm going to find another property to move my business to, because at this point now you're trying to bankrupt a business, right?"
It's worked – so far. But Rodriguez is worried about the future.
For others, negotiating a late payment is an option. Nicole Pomije owner of Minneapolis-based The Cookie Cups, which makes cookie kits for kids, has a 372-square-meter office space along with a warehouse where she develops her line of baking kits. Her rent rose 10% this year to $4,000 monthly. Then there are unanticipated bills, such as $1,500 for snow plowing.
"There's so much stuff that pops up that you just you never expect," she said. "And it's always when you never expect it."
Pomije hasn't raised prices, but instead tried to mitigate the higher rent costs by buying materials in bulk – like ordering 5,000 boxes instead of 1,000 boxes for a 40% discount -- and finding cost savings elsewhere.
Still, there have been several months over the past couple of years where she couldn't pay rent on time. So, far the landlord has been amenable.
"If we have a conversation like hey, we don't know if we're going to make it for the first this month. It might be closer to the tenth," she said.
Asked if she thinks costs might ease in the future, Pomije said she is focused on the present.
"It's weird, but I'm trying not to think about the future too much and I'm trying to just do what we have to do, and get ready for a holiday season and just, like, get everything paid on time now," she said. "And then we'll kind of reevaluate everything in January."