Originally posted on Quora on September 21, 2022
Many are deliberating over the causes of record inflation but few are striking at the root of the problem. Dems are blaming employers and Trump while Repubs are pinning the onus on the dementia patient occupying the Whitehouse, yet most are ignoring the elephant in the room they FED with near zero overnight rates and trillions in MBS purchases. It’s the rent stupid.
Rent hikes aren’t just a problem for residential tenants. Most businesses also have landlords who can be more or less reasonable about the cost of leasing depending on the size of their tenant’s business. As I mentioned in Commercial Rent Are The Biggest Barrier to Entrepreneurship, commercial landlords typically give big box stores a discount for large layouts and charge small local businesses a premium per square foot of store space because banks prefer to make more conservative investments in large layouts that will be leased to big box stores and charge landlord’s lower rates for them. This advantage was further entrenched by the fact that SMEs with fewer employees were disproportionately and unilaterally shut down during lockdown measures while big box stores were allowed to stay open despite having more employees and customers in their stores than permitted for “mass gatherings.” As a result, they inevitably lost revenue and were unable to keep up with rent. By January 2021, 33% of small businesses were unable to make monthly rent payments. That number has jumped to 40% as of August 2022 and is as high as 50% for agricultural businesses.
Rent hikes in commercial real estate dwarf those in residential. While residential rents nationwide have, on average, increased 14% and upwards of 30-40% in big cities like Austin and Miami since the end of the eviction moratorium, 45% of small business owners are paying 50% or more in rent since the lockdowns, 24% are paying double in rent (a 100% increase) and 12% are paying triple what they did pre-covid (a 200% increase), but even that isn’t the upper limit. A soul food restaurant in Jacksonville, FL is facing a 400% rent hike that would force them to close shop and relocate. Now with the Fed raising rates to curb the inflation they created many small businesses are finding themselves pinned between a vise of rack rents and lower aggregate demand. Small business confidence in their revenue stream being “fully back” has almost been cut in half since last December when it reached 43%; it has now dropped to 23%.
Sources: Jacksonville Business Faces Potential 400% Rent Hike, May be Forced to Close, Rent Crisis on Main Street just took a turn for the worst