For small and medium-sized enterprises (SMEs), cost management is everything. With overheads already tight, one expense that’s putting increasing pressure on business sustainability in Australia is rent. Rising commercial rents are a significant red flag when it comes to SME financial health, as they not only affect cash flow but can also indicate deeper systemic risks.
The Rising Cost of Leasing Commercial Spaces
According to data from the Property Council of Australia, average commercial rent prices in capital cities have surged in recent years—particularly in prime CBD locations. The Sydney Morning Herald reports that rents for commercial spaces in Sydney and Melbourne increased by up to 12% year-on-year in 2024. This spike is unsustainable for many SMEs, especially if their profit margins are already thin.
Unlike large corporations, SMEs often operate with minimal reserves and less bargaining power when negotiating lease agreements. When rents go up, SMEs are more likely to be squeezed out or forced into difficult financial trade-offs.
Cash Flow Crunch: The Immediate Threat
The most direct impact of rising rents is a hit to cash flow. Rent is typically one of a business’s largest fixed costs. When this expense rises, it reduces the capital available for other crucial activities such as marketing, inventory purchases, staff wages, or investing in growth.
Poor cash flow is one of the leading causes of SME failure. A 2023 report from Xero found that over 50% of small businesses in Australia experience negative cash flow at least one quarter each year. Rent hikes only worsen this pressure.
Long-Term Financial Strain
Beyond immediate cash flow issues, escalating rents contribute to long-term financial instability. SMEs often sign multi-year lease agreements that include built-in rent increases, sometimes outpacing inflation or growth in revenue.
This long-term exposure can make SMEs less agile, less creditworthy, and more vulnerable to economic shocks. As fixed expenses climb, even slight downturns in revenue can push businesses to the brink.
Relocation Risks and Business Disruption
Faced with unaffordable rent, many SMEs consider relocating. But moving a business isn’t just a matter of logistics—it involves risks of losing foot traffic, customer familiarity, and even staff. Relocation can also lead to unexpected costs such as refitting, signage, and marketing to inform customers of the new location.
In industries where location is critical—such as hospitality, retail, and health services—moving can significantly affect earnings. According to Business News Australia, some businesses are even being priced out of their communities.
Market Trends and Landlord Leverage
Current market dynamics also place landlords in a strong position. With reduced vacancies post-pandemic and a return to in-person work, demand for commercial space is growing faster than supply in many urban areas.
Landlords are less inclined to offer incentives or rent reductions, leaving SMEs with fewer options. In some cases, landlords are preferring to lease to larger, more stable tenants, further marginalising smaller businesses.
What Can SMEs Do?
To maintain financial health in the face of rising rents, SMEs must become more strategic. Here are a few actions businesses can consider:
- Review lease terms before signing or renewing. Look for clauses that may trigger steep future increases.
- Negotiate rent reviews or ask for rent-free periods to cushion upfront costs.
- Conduct a location cost-benefit analysis to ensure the commercial value aligns with rent.
- Explore shared workspaces or subleases, particularly for service-based businesses.
- Work with business advisors who can help analyse overheads and develop long-term sustainability strategies.
You can explore more tailored financial advice and strategic planning through Avante Partners, which supports SMEs across Australia in navigating operational and financial challenges.
Policy Gaps and the Need for Support
Many industry experts have called for government intervention or incentives to support small businesses facing rental stress. As noted in a report by the Council of Small Business Organisations Australia (COSBOA), there is growing concern that without policy support, rising rents may trigger a wave of SME closures, particularly in metropolitan areas.
Wrapping Up: The Impact of Rising Rents
Rising rents are more than just a cost increase—they’re a red flag signalling deeper vulnerabilities in SME financial health. In an environment where every dollar counts, these increases can undermine cash flow, restrict growth, and even jeopardise business survival.
SMEs must remain proactive, leveraging every available resource to stay ahead. The cost of ignoring this red flag could be far greater than just a few extra dollars per square metre.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult with a qualified financial advisor before making business decisions.
