Rentflation Continues to Threaten Brick-and-Mortar Businesses

Rentflation Continues to Threaten Brick-and-Mortar Businesses

According to recent statistics from the Bank of America Institute, cost constraints are still a pain in the side for small firms, with rent inflation surfacing as one that is especially acute.
(Photo : by Justin Sullivan/Getty Images)

According to recent statistics from the Bank of America Institute, cost constraints are still a pain in the side for small firms, with rent inflation surfacing as one that is especially acute. The burden is evident: through May, small enterprises' average monthly rent percentage of total payments increased significantly to 9.1% from the 2019 average of 5.9%.

There's an uneven distribution of this pressure. The survival of local businesses is further threatened by rent inflation in cities like Las Vegas, which is more than twice as high as the national average.

A Glimpse of Relief on Wages

Still, there is a bright side. There seems to be a minor decrease in wage inflation, which is good news for small firms. According to the Bank of America Institute, the South is experiencing the greatest growth in nonfarm payrolls overall, with payroll payments rising by over 30% in 2019 in places like Charlotte and Tampa.

Data Reveals Rent Spike, But Profitability Shows Signs of Life

A concerning pattern has been identified by the Bank of America investigation, which examined data from small companies that routinely pay rent through their accounts: in May, the average monthly rent payment per client increased by 12% year over year. This increase suggests that inflation, rather than firms merely expanding into larger locations, is the primary cause of the growth in the Producer Price Index's nonresidential real estate rentals component.

In spite of the obstacles, the data shows some promise. The Bank of America Institute uses the inflow-to-outflow ratio as a stand-in for earnings. In May, the ratio increased to its highest point since March 2023. It's crucial to remember that, on average, this ratio is still lower than it has been in recent years.

Read also: Inflation on Food, Goods, Services Hits Urban, Rural Areas Differently 

Brick-and-Mortar Struggles in a Shifting Landscape

Before, the "For Lease" signs were an infrequent sight, a blip on the colorful streetscape. They appear to be popping up like weeds on once-bustling roadways these days. The unrelenting grasp of rentflation serves as the backdrop against which this drama is told. The mainstay of many communities, mom-and-pop stores, are especially susceptible. The Miller family has operated the charming corner business Sarah's Sundries for three generations, making it a mainstay in the community. However, the Millers are faced with a painful decision: either raise rates on their already overworked clientele or close their doors due to rent having doubled in the last year.

The problem is about the essence of retail, not just about survival. Physical retail establishments provide an encounter - the amiable conversation with a well-known cashier, the chance finding during a shopping expedition. Giants in e-commerce, with their impersonal efficiency, are unable to duplicate that human touch.

However, well-established chains are not impervious. The national shoe shop "Stride Strong" is having trouble making ends meet. Their rent is eating away at their profit margin, so they have to find other ways to save money, like hiring fewer people or cutting marketing expenditures, which can jeopardize customer service.

Hope for the Future of Local Businesses

There are pockets of optimism. Realizing the value of a strong retail environment, some landlords are collaborating with tenants to create solutions, such as revenue-sharing plans, flexible leases, or rent freezes.

Brick and mortar stores' future rests on a multifaceted strategy. Companies must change and adopt omnichannel strategies that combine online and in-person interactions in a smooth manner. Consumers have a part to play as well. Even if it takes paying a few additional dollars, supporting local businesses may have a huge impact.

Related article: High Rates Make Home Improvement Loans a Double-Edged Sword 

The content provided on is for informational purposes only and is not intended as financial advice. Please consult with a professional financial advisor before making any investment decisions.

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