What Percentage of Business Income Should Be Spent on Rent?

Rent. It’s the first thing business owners think about when searching for a new spot. A newer building in the center of town may be what you want, but if you can’t afford the rent, you’re setting your business up for failure. 

What percentage of business income should be set aside for rent? How much of your sales should cover the rent rate? The answer depends on your industry and your business. 

Higher profits mean you can afford a higher rent on a nicer building. Not all businesses need a space with sophisticated aesthetics or high-class appeal. Keep your customer base in mind when searching for commercial property.

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Rent-to-Revenue Ratio

The rent-to-revenue ratio helps determine if you can afford commercial rent. With some quick math, you can discover if your business can afford a property or not. Companies can also use this ratio to determine if they are paying too much rent under their current lease.

Finding the ratio starts by calculating your annual income. Subtract the costs of goods or services sold annually from your total revenue. The next step is to divide the annual rent by the anticipated revenue you just found. Dividing the two leaves you with the percentage of sales that would go toward paying rent.

$40,000 revenue / $200,000 annual rent = 0.2 or 20% of sales needed to pay rent

Common Rent-to-Revenue Ratios by Industry

Generally, your business should budget 2% to 20% of sales for rent costs. How much you can expect to pay depends on your situation. 

What should you spend on rent? Use these benchmarks to determine if your business can afford renting a commercial property: 

  • Retail stores: 5% to 10%
  • Restaurants: 6% to 10%
  • Law firms: 15%

Every business is different, so you may not fit in the categories above. Regardless, you can use these ranges to see how your business stacks up against national averages. Are you struggling to make ends meet, or are you turning a profit? 

Retailers and restaurants should target lower base rental rates of no more than 10% of their annual sales. These types of businesses face dynamic changes in revenue when the economy dips, consumer trends change and global events occur. 

Social media and online ordering had already changed how storefronts and restaurants operated before the pandemic. In 2022, these factors play even more of a role in shoppers’ minds as people are used to ordering online or shopping on Instagram through their favorite influencers. 

While U.S. retail sales are expected to grow this year, inflation and the Russian invasion of Ukraine have caused gas and food prices to soar, leaving retailers to wonder if shoppers will keep spending. Retail stores and restaurants rely heavily on a good economy, where consumers are ready to buy.

On the other hand, some businesses are not as significantly affected by economic swings. Businesses like law firms can handle paying more rent. Lawyers are a necessary service in times of need. Their clientele may expect a stylish office space, and they charge more for their services. 

Rising Commercial Rent Costs in 2022: A National Look

Commercial rent is on the rise for every industry. 

The National Association of Realtors reports that rent growth for neighborhood and strip centers increased 4.7% from 2021 to 2022. Rent for malls increased 3.8%. Alongside rent growth, the prices of goods and services are also rising, up 8% in May 2022 compared to the previous year. 

For industrial and logistics spaces, asking rents have risen 13.3% in 2022 compared to 2021. Online sales have increased since pre-pandemic levels, accounting for 16% of all sales. Continued focus on online sales means more warehouses and industrial spaces are in demand. 

Office spaces are recovering slowly from the “Great Resignation,” job switching, remote work and inflation. As employee expectations change for the workplace, it affects where that workplace will be in the future—at an office or home. 

Teleworking has declined from 35% to 8% of employed workers since the peak of the pandemic, but it is still up from pre-pandemic levels. Bigger cities are seeing a slower office recovery than smaller markets. 

Demand for more affordable buildings is also a growing trend. Rents for Class B and C buildings are rising at a faster pace than rents for Class A buildings. 

We’re Still Booming: Branson, MO 2022 Outlook 

Branson, Missouri, didn’t just survive the 2020 pandemic. It came out thriving the following year. While tenants and property owners experienced hardships in 2020, especially in the live music and theater industries, the area set records in 2021.

Branson, MO, saw well over ten million visitors in 2021, beating pre-pandemic numbers. Local retailers reported increases of 15% to 25% or more sales in 2021 compared to 2019. Branson retail tenants are experiencing higher rents in 2022 as rents continue to rise across the country. 

Local rents for industrial and warehouse spaces increased from 10% to 12% in 2020 to 2021. For 2022, we expect warehouse rents to increase 5% to 8% more.

Inflation is causing increases in operating costs and common area maintenance (CAM) fees across industries. As the economy changes, rent rates in the Branson, MO, commercial real estate market will rise. 

What If You’re Paying Too Much Rent?

You put the rent-to-revenue ratio to practice, and you found out you can’t afford to pay that much rent. Now what? If your current space is too pricey or you’re looking at a property that’s out of reach, it’s time to explore other options. You can adjust your budget or look at more commercial properties for rent that fit better with your financials. 

  • Talk to the landlord. The first step to reducing a property’s rent is to talk with the landlord. They may or may not be open to negotiating the rent in exchange for removing other amenities or having your business take on more responsibility for the property. 
  • Adjust product and labor costs. Rent is one of your biggest expenses. After rent, the next hefty expenses are labor and the cost of your products. Adjusting labor and product costs can free up more business revenue for rent. 
  • Reduce property size. Go big or go home doesn’t apply to commercial real estate. If the rent you’re paying or considering paying is too high, you may need to downsize and look at smaller properties. Do you really need all that space?
  • Choose a different neighborhood. The area market rents could be too expensive for your business. If you don’t think your profits will balance out the rent cost, you should explore options in another neighborhood. Location is important, but you need to be able to afford it. The money you save from renting in a different neighborhood can be used to make the property more appealing to customers or on marketing efforts.

In search of commercial real estate? Look no further than Branson, MO! Contact Commercial One Brokers. Our expert team will help you find industrial, retail, office and restaurant properties in the booming Branson, MO area

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