Balancing inflation and real estate needs for your small business

Recent inflation has caused many widespread effects for small business owners, including a rise in the cost of commercial real estate.

If your company's lease is up for renewal or you're looking for a new space for your business, you'll want to understand the impact of inflation on real estate prices and how you can manage this important cost.

How inflation affects real estate

Learning more about the relationship between inflation and real estate can help when you're starting a business or changing your current location. When inflation rises, property values tend to increase as well. Although this may help some businesses looking to sell property, the rising costs associated with inflation must be managed for those looking to buy or rent.

If you're in the market to purchase a building for your business, you may have noticed interest rates beginning to tick upward. The Federal Reserve increases rates as a measure to slow inflation. The result is that higher interest rates increase the cost of financing a commercial building. This increase should be taken into account when determining how much you can afford.

In addition to interest rates, other real estate costs that may rise due to the effects of inflation on property value include:

• Insurance premiums: May trend higher as underlying replacement costs of building materials increase
• Property taxes: Often coincide with a rise in property values
• Repair and maintenance costs: May also increase with inflation

Property managers can even face higher costs for repairs, maintenance and other administrative expenses due to inflation. As a result, renters may end up paying higher rents or receive larger annual increases.

Managing the increased cost of real estate

During a period of higher inflation, there are several strategies you can use to manage real estate expenses. Understanding the pros and cons of buying versus leasing a commercial property can help you make the best decision for your business.

You'll also want to consider other important factors like the type of property you need—a retail shop versus an office location, for example—and how much you can afford to fit into your business budget.

Understanding how much space you really need

According to a recent small business survey, 29% of respondents moved to a cheaper space to counteract inflation. If you want to lower real estate costs, you might want to consider a smaller space that would still fit your needs.

With recent shifts toward more remote work, you may not even need to provide space for every employee to be in the office every day. Coworking spaces can be a much more efficient use of your space and office resources.

In addition to space requirements, you should consider other factors that affect real estate costs.

• Take timing into account. You may be able to plan your move for a less popular time of year to save on relocation services or take advantage of rent specials.
• Find an ideal location. Consider shifting away from prime locations toward areas where tax incentives may be available. However, it's also important to take into account your customers' potentially increased travel times if you move farther away from a centrally located area.
• Rethink your current space. Rather than incur the cost of moving, price out changes that can be made to your existing building. Consider retrofitting or building an addition. If your building is the right size but could use some improvements, invest in modernizing or sprucing up the interior instead of paying to relocate.

Planning for future inflation

If both inflation and real estate prices continue to rise, consider employing one or more of the strategies below to balance higher costs in the future.

• Increase prices. Passing along a portion of your higher costs in the form of price increases may help your business handle rising inflation and real estate costs.
• Rework your budget. Instead of raising the price you charge customers, balance higher real estate costs by lowering other expenses. This may include finding operational efficiencies and managing supply chain issues.
• Reconsider business growth. Now may be the time to rethink your growth strategy. Consider changes that will help you better use your current space so you can ride out a wave of higher inflation.
• Invest in technology. Purchase equipment that adapts to a remote environment to give you and your staff more flexibility to work from home.

Inflation can sometimes throw a wrench into even the best-laid business plans. An unpredictable supply chain, higher prices and rising rents may cause you to rethink your current office or retail setup. If you're considering a move, look for locations that match your needs and that'll allow you to manage the highs and lows of the long-term real estate market.