Rising housing prices do not have a direct one-to-one impact on small business cash flow. However, the increased cost of living can have cascading effects that may have negative downstream cash flow consequences for some small businesses.
One of the two primary cash flow consequences of a rapid increase in housing prices is payroll costs.
For example, if Scottsdale were to experience a rapid increase in home sale prices or rent costs, workers who live in Scottsdale would potentially need large and frequent increases in their salary to continue living and working in Scottsdale.
As of September 2024, there’s roughly a 3.1 percent YoY increase in home sale price and a 16.4 percent decrease in the number of homes sold. Median rents in Scottsdale have also increased roughly five percent year-over-year from $3,000 to $3,149.
The impact can be particularly severe if the small business can’t easily raise its prices to counteract the increase in labor costs due to competition, company policy or other market factors. For example, a franchise operating in Scottsdale might have limited control over the prices they can charge to Scottsdale consumers, but they may still need to pay their staff more due to increasing rents in the area.
The other clear way in which a housing market boom may affect businesses is the cost of commercial space. The impact is not universal across all small businesses. Some may be able to pursue alternative lease solutions to counteract this cost:
The importance of business location and the difficulty of a move influence the feasibility of these options. Retail or food service businesses might not be able to easily relocate without even more serious cash flow repercussions, but a marketing firm or accountant may not have the same concerns.
Commercial leases don’t always increase uniformly. The 2023 office vacancy rate in Scottsdale was just under 15 percent, and there was only a 3.4 percent increase in average rent for the year. The average 2023 sale price for commercial space was down approximately 15 percent from 2022.
More recent City of Scottsdale data from Q2 2024 have office vacancies at 16.5 percent, retail vacancy at 4.1 percent and industrial vacancy at just 2.6 percent. YoY changes in price per square foot varied depending largely on vacancy rates.
For example, the price of industrial space in Airpark Industrial, which had only 3.7 percent vacancy as of Q2 2024, increased 7.8 percent from $20.88 per sq. ft. in Q2 2023 to $22.53 sq. ft. in Q2 2024.
The price of Airpark Office commercial space, with 16.8 percent vacancy, increased only 0.87 percent from $32.08 per sq. ft. in Q2 2023 to $32.36 per sq. ft. in Q2 2024.
While there are variations, higher demand for specific types of commercial space typically result in steeper price growth.
How much those increases impact a business’s cash flow can vary. Businesses with inconsistent cash flow or particularly tight margins might feel the pinch more than those with consistent cash flow and larger margins.
According to Zumper.com, Scottsdale rental costs in September were up 21 percent compared to August but were down 11 percent year-over-year. The median rent in Scottsdale, $3,000, is 55 percent higher than the national average. The median rental cost in Phoenix is just $1,700, which is 12 percent lower than the national average.
Scottsdale’s relatively small geographic size, plus its proximity to other parts of The Valley, does make commuting from other, more affordable parts of the Phoenix area feasible. The ease of travel, or the ability to work remotely, may mitigate the cash flow challenges posed by the increased cost of living in Scottsdale.
That being said, attracting the best talent may necessitate paying Scottsdale-level salaries, which can impact cashflow.
As of 2024, the median family income in Scottsdale is $129,072 compared to $75,683 in Phoenix and $85,028 nationally. Serving higher-income consumers can help alleviate cash flow concerns for small businesses in Scottsdale. Typically, higher-income individuals are less sensitive to increasing housing costs and are more likely to maintain their spending levels despite higher rent or mortgage payments.
Lower-income households are more likely to change their spending habits to compensate for increased housing costs. Small businesses serving those consumers are more likely to experience cash flow challenges as a result of increased housing costs.
H&H Accounting Services has helped Scottsdale business with a host of accounting and consulting tasks, including cash flow management. If you’re a small business owner concerned about cash flow, or you are looking for financing or loan assistance, don’t hesitate to contact our accounting and business consulting team by calling (480) 561-5805.
