Effect of “rent-flation” on natural health retailing community
By Bruce W. Cole
While the world has slowly but steadily recovered from the fallout of COVID-19 pandemic, retailers are still dealing with its aftereffects—specifically from a phenomenon called “rent-flation.”
During the pandemic, several property owners and landlords reduced or froze rents to help retailers when business was down. Now, that landscape looks much different. Many retailers are facing rent increases, even though customer counts have not increased and sales figures are nowhere near where they were in pre-pandemic days.
Research analyst Alchad Alegbeh of the Canadian Federation of Independent Business (CFIB) says he has been hearing about rent increases from members. A CFIB survey conducted in fall 2023 confirmed that this is a prevalent problem that the retail sector needs to navigate through.
“Currently, we have 41 percent of our retail members seeing rent increases of between six and 29 percent. Another 10 percent have seen an increase of 30 percent or more.” Six percent of those surveyed have relocated their stores, while another 31 percent are considering moving.
“Twenty-six percent are trying to negotiate a better rate, and some are considering moving to a smaller space to reduce rental costs,” said Alchad.
Hoping for stable rents
Members of the natural health retailing community have not been immune to the rising rent pinch. Melinda Assaf, co-owner and CFO of Kardish Health Food Centre in Ottawa, ON, says, “we thought we would see more stable rents or maybe modest increases, as there were more vacancies post-pandemic. Instead, we’re seeing rent inflation despite many vacancies and less traffic going through our stores.”
Kardish has seven stores in Ottawa. Over the past two years, three of them were forced to move because of rent increases. “In Barhaven, the landlord tried to raise our rent by 50 percent. It is a good area, but a 50-percent increase is just too much. We tried to work with them to stay, but not at that cost increase. We gave them traffic counts, and showed them sales figures, but they were set on what they wanted for rent.” Kardish eventually moved to a new, more affordable location in the same area.
Melinda wonders if the landlord’s rock-hard stance has somewhat backfired, as almost a year later, the space Kardish vacated is still empty.
“Big guys” are the problem
Murray McMahon, CEO of Good Health Mart in Ontario, places landlords in one of two groups: those that are reasonable and those that are not. “There are a few good landlords. The others consider you a cash cow. The reasonable landlords in Ontario, I could count on two hands. It’s the ‘big guys,’ with many layers of bosses and a board of directors, who are used to making 15 to18 percent for shareholders; they are the problem.”
COVID-19 should have been a lesson for these landlords, Murray says. “They still do not consider their tenants customers. Landlords are shooting themselves in the foot as they continue demanding high rates. They don’t really seem to care. Well, maybe they do to a point, as long as they get their increase.”
Foot traffic still down
Wayne Parent, president of Nutrition House, says his organization was most likely impacted more than most natural health retailers. Nutrition House has 45 stores, located primarily in high-profile malls across Canada. “With virtually all our stores in shopping centres, we probably had the most locked down stores of anyone.”
Over the past few years, Wayne has been able to work with landlords to get some reductions, but now they are coming back at renewal time, saying things are back to normal and demanding pre-pandemic rent rates.
“The problem is mall traffic is not where it was pre-pandemic,” explains Wayne. “Yes, it might be in some of the top malls, but not in some, like downtown Toronto, where many workers have a hybrid model, only coming to the office two days a week. Customer traffic and sales are still being impacted.”
Landlords in some cases have seen that and have been cooperative, says Wayne. “The malls don’t want any vacancies, as it leads to more vacancies. It is hard for them to get other tenants to come in. Increases haven’t been outrageous yet, but if we can’t do it, we ask for it to stay flat for a year or two, when we can handle the increase. It all comes down to what can a store can afford.”
Small-scale landlords are more understanding
Brad Winsor, president of Nutters Everyday Naturals, believes that small-scale landlords are more understanding when it comes to rate increases.
“Many of Nutters’ existing rental agreements are with long-time, generally smaller landlords. Most of these landlords are retired or semi-retired, and they are quite content to have existing people in place. We’ve seen increases of between three and four percent. We were even able to negotiate two leases re-signed with no increase.”
That is not the case for all Nutters stores, which number 25, and are located in Alberta, Saskatchewan, Manitoba, and BC. Some of the stores have rental agreement with larger landlords and those stores have seen increases closer to seven and eight percent. “Our Canmore location has gone up eight percent on its new lease. The rent for our new locations represents roughly 10 percent of annual sales, which is ridiculous for a new store. It takes time to build a business, especially for new franchisees: usually a small family, with their house on the line.”
Ideas to combat rent-flation
What can small businesses do when negotiating? Melinda suggests a few things. “You could ask for a free rent period. You could ask for some tenant allowances, where the landlord pays for some things. Ask the landlord what they can do for you: new floors, painting, windows, and signage. Maybe there can be some parking lot improvement or landscaping. These are all things that will add value to their property.”
Melinda thinks there should be some regulations when it comes to commercial rent. “In Ontario, there is no limit on commercial rental properties. Residential has much more protection. Maybe there should be a cap on how much a landlord can increase rent.
“If you are a giving, compassionate landlord, if you balance it, you’ll keep your tenants. It depends how you operate. Are you going to be a great landlord to your tenants or a robot?”
Wayne says there have been positive signs. “In some cases, we’ve extended the lease on a short-term basis on a percentage-rent arrangement, where we pay a percentage of monthly sales rather than a fixed rent. This helps us in case sales stay low, but benefits the landlord in cases where sales increase.”
Alice Chung is the president and CEO of Alive Health Centre, BC; Morning Sun Health Foods, Alberta; and Supplements Plus, Ontario and BC. With 23 stores in three provinces, she has extensive experience dealing and negotiating with landlords. She reminds her fellow retailers that, when they are re-negotiating a lease, the last thing a landlord wants is to have a tenant leave.
“It is very expensive to re-rent.” If the tenant has been in the same space for a lengthy period of time, Alice explains that extensive renovations and upgrades could be required. “Downtime is very expensive without income, while renovating and trying to lease…it could be months!”
Counterbalance rising rents
Brad doesn’t have an answer to the dilemma. He does, however, suggest one proposed course of action to tackle the escalating rental expenses: put even more focus on your store. “Introduce additional product categories, improve service offerings, or implement supplementary revenue-generating initiatives in order to counterbalance the effects of rising rents.”