When Small Businesses Can't Pay Their Rent, Can A Recession Be Far Behind?

Another huge harbinger of an impending recession is happening in the commercial real estate leased to small businesses.

According to an October analysis from the Alignable Research Center, small-business owners are not paying their rent — in droves.

Alignable’s poll found that in October, the U.S. rent delinquency rate among small businesses jumped 7% from September to 37%, the most significant increase this year.

Those responding to Alignable’s poll cited higher rents, the negative impact of high inflation, recessionary fears, a consumer spending slowdown and ongoing supply chain costs as the biggest contributors to delinquency.

Detroit-area landlord advocate attorney Matthew Paletz, who represents clients throughout the Midwest, told Benzinga it’s time for small businesses to embrace the fact that the economy is headed for more than an inevitable downturn.

“These numbers show we are not on the precipice of a recession. It’s here. Although facing the stark realities of current overhead is here, many companies are going to have to accelerate the jettisoning of the large office space,” he said. “Small businesses will continue to prioritize their people over square footage.”

The study also found that some specific categories of small businesses — particularly the automotive sector and restaurants — are being especially hard hit, leading to an inability to pay rent. Both automotive businesses and restaurants reached new rent delinquency highs near 50%, according to Alignable.

Although the numbers in the poll are focused on small-business tenants, Paletz says landlords are also at risk.

“No one is saying that the rent increases have not been necessary. These commercial space providers were also hit hard by the pandemic and are not immune to inflationary costs,” he said. “I do believe, however, it is shortsighted for landlords to begin cannibalizing existing tenants who want a conventional office space and continue to raise rates on those still sticking around trying to make a go of it.”

The restaurant industry specifically is having a continual tough go. It had a momentary bounce after the worst of the pandemic but is still struggling with the bigger hurdle of finding employees. Based on the latest statistics, things are far from back to normal, with nearly half of all restaurants not able to pay their rent in full and on time in October — up a whopping 36% from September. Those polled blamed the fact people are not eating out and are more concerned about extra disposable income.

Not surprisingly, based on the current state of the housing market, real estate and construction companies are also having issues paying rent on time, with delinquency numbers increasing by 10 percentage points in October to 37%.

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