August 12, 2020

August 12, 2020

Topics: KC's Column

Small Business Update – Big Challenges    

Depending on the metric utilized (jobs, revenue, GDP, SBA, etc.), small businesses drive between 45% and 70% of the U.S. economy. They also matter to the CRE industry as small businesses occupy more commercial real estate space than large corporations. Our economy expands and contracts based on their level of activity, and our neighborhood and community vitality depends on small businesses for a majority of our daily services that range from auto repairs and transportation, to daycare and dry cleaning, to restaurants and healthcare, etc. Try imaging your neighborhood grocer-anchored shopping center without small businesses in the adjoining shops; or industrial and office parks without the myriad of small and medium sized businesses that occupy the majority of those buildings. Less than 20% of our office buildings and warehouses are occupied by the large banks, such as JPM, Citi or Regions Bank, or the large logistics (Amazon, FedEx, UPS, Walmart, etc.) and FAANG/technology companies (Facebook, Apple, Amazon, Netflix, Google). COVID-19 has impacted these small and medium sized businesses with less than 500 employees more than during the 2009 Great Recession, or any time since record keeping began on them in the early 1970s by entities such as the National Federation of Independent Businesses (NFIB – 1973).  With Coronavirus Cases - JHU spreading at record levels (5 million cases in the U.S today versus <100,000 cases April 1, 2020, and outside the previous top two hotspots of New York and New Jersey to Florida (now #2), Texas (#3), Georgia (#5), Arizona (#7), North Carolina (#9) and even Alabama (#14 with more than 100,000 cases), and states revisiting their reopening scenarios that commenced in May 2020 just as the nation faces return-to-school plans, the latest data on small businesses are most concerning.


ACRE tracks the health of small businesses as part of a dashboard on the vitality of commercial real estate via a number of resources that go beyond the Census Bureau and Commerce Department. The five primary ones include: i) ADP Employment report (breaks out jobs by size of business); ii) Paychex - Employment Watch report that monitors a myriad of metrics on small business employment activity; iii)  the National Federation of Independent Businesses (NFIB - Small Business Optimism Report); iv) National Center for Middle Market companies (NCMM - Quarterly Market Indicators report); and v) American Bankruptcy Institute (ABI - Bankruptcy Stats by State).  Each of these are discussed below in context with a Bloomberg feature this week on small business failures titled "Small Businesses are Dying by the Thousands ...".  The primary data for this Bloomberg spotlight on small business failures came from Yelp for the period March 1  - July 25, 2020.  Some highlights – and a key graphic - from this Bloomberg feature to set up this week’s insights on small businesses as a proxy for CRE conditions ahead in 2H2020 are as follows:

  • Firms with fewer than 500 employees account for about 44% of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ an estimated half of American workers. The health of these businesses is a bellwether for what lies ahead for banks and CRE lenders that are forecasting loan losses - not just in CRE lines of business but C&I (Commercial and Industrial) lending as well.  A lot of C&I loans in banks are essentially secured by real estate that the respective businesses operate within. 
  • Yelp Inc., the online review data intelligence company, has new data showing more than 80,000 small businesses permanently shuttered from March 1 to July 25, 2020. Approximately 75% of these businesses (60,000 establishments) were local businesses with fewer than five locations.
  • This latest count, though, is believed to substantially under-report actual business closings. Why? The 80,000-figure does not include what is commonly referred to as “silent failures.” They are termed “silent-failures” because a substantial number of small businesses (especially those with less than 50 employees) typically have no bank debt (they use a home equity line of credit, “friends and family” unsecured loans or equity infusions, or life savings to fund their business), and thus no need for bankruptcy or a court action to document their closure absent recorded debt or bank liens. According to NFIB Chief Economist William Dunkelberg, the business closure process for many small business failure is no more than “a call to the utilities and tell them to turn them off and close your door.”  He concurs with this Bloomberg feature on small business failures stating that: “We are going to be well above normal business failures because we’re in a disastrous economic situation.”
  • Regardless of the undercount for “silent failures,” the American Bankruptcy Institute estimates the 2020 total for small business bankruptcies will be up 36% from 2019. That estimate would surpass any year from the Great Recession.
  • And finally, although retail and restaurant closings garner the majority of the headlines thus far this spring and first part of summer, “Miscellaneous” is the category with the most business closings outnumbering restaurants by more than 2:1. 


Last week’s WIN titled Like Real Estate, it’s all local when it comes to State Budgets,” highlighted the revenue hole developing in state and local municipality budgets from less business activity and collection of items like sales taxes.  The health of state budgets and small businesses are inextricably linked. What is bad for one is bad for the other.  As businesses operate under occupancy restrictions to combat the virus – and then increasingly fail as operating at 50%, 60% or even 70% capacity doesn’t reach a breakeven level for most businesses - states collect less revenue and have to pay out more in expenses like unemployment insurance. Recall this one graphic from the Tax Foundation and how important sales taxes and business operations are to state budgets – even in Alabama where 30% of state revenue comes from sales taxes.

ADP’s August Employment Report for July:

Unlike the monthly BLS Employment Situation report, ADP's report is not a survey; rather, it is an actual count of employment activity as the nation’s largest payroll services provider. It also is focused on private payrolls where business creation and failure occur and most influences the U.S. economy.  In its latest August 2020 report for the July 2020 period it noted two key items that are consistent with the aforementioned Bloomberg feature - neither foretell good news for small business in the second-half of 2020. 

  • First, job creation – or rehiring due to state re-openings – in July 2020 slowed dramatically.  ADP reported 19.7 lost private jobs in March and April 2020 followed by 7.65 million re-hires in May and June 2020. As the virus spread worsened in June and July 2020  after the start of states reopening, occupancy restrictions have reinstated and businesses responded by pulling back on rehirings in July 2020 to a mere 167,000 jobs.  This private employment pullback is a precursor to more big challenges for small businesses this fall. It is a canary in the coal-mine that more businesses will fail in 2H2020. Keep in mind that on a net basis, more than 12 million jobs have been lost in the private sector since March 2020 and that continuous jobless claims have remained above 1.0 million for 20 consecutive weeks. 



  • Second, employment in small businesses with between 50-499 employees is the only sector not to experience recovery and rehiring this summer. This segment lost 25,000 jobs in July 2020.


Paychex  Employment Watch August Report for July Period:

The Paychex/IHS Markit Small Business Employment Watch report is the most comprehensive view into small business hiring and wages that goes deeper than ADP as it is the resource most used by small businesses for payroll services. It draws from the payroll data of approximately 350,000 Paychex clients to gauge small business wage and employment trends on a national, regional, state, metro, and industry basis. The key chart and metric to note in the current release is the Small Business Jobs Index. It has fallen to 94.59 (down another 3.65% in July 2020), or below the previous record low of 94.87 from July 2009. The regional data and map are noteworthy as they highlight that what was a Northeast COVID-19 hotspot is now a South and West hotspot challenge impacting small businesses. A few key notes from Martin Mucci, Paychex president and CEO to add context to the decline in the Paychex Job Index are:

  • Blame COVID-19 spread: Employment growth moderated as new COVID-19 hot spots emerged in the South and West regions of the U.S. The national jobs index slipped 0.24 percent in July 2020 to 94.59.
  • It’s worse in the South and West: The rebound in small business job growth has slowed mostly in regions where there has been a recent surge in cases. The South and West reported the largest declines in employment growth, -0.31 percent and -0.33 percent, respectively.

NFIB - Small Business Optimism Report :

The NFIB’s most watched Small Business Optimism Index fell from record 104 to 107 levels in 2018 and 2019 to a COVID-19 low of 90.9 in April 2020 – a level not seen since the Great Recession. The index rebounded in June 2020 back to a level of 100 (greater than any level in the last 2 years of the Obama administration) on hopes of a recovery from states reopening.  However, like ADP and Paychex July period reports, the reality of the coronavirus not being contained and spreading is also appearing in NFIB survey data. The August 2020 period data is expected to be even worse with no fifth stimulus/rescue fiscal bill eminent from Congress. 

The composition of the elements driving the decline in the Index is particularly noteworthy. The survey questions related to Earnings Trends and Credit Conditions are negative and the survey question with the most decline or negative response is “Expect the Economy to Improve” (-14). 

NCMM - Quarterly Market Indicators report:

The National Center for Middle Market companies (entity that monitors those businesses with gross annual revenue between $10 million and $1.0 billion) is housed at Ohio State University and focuses on the most robust segment of small businesses – those that survived startup, surpassed proof of concept, and are on a solid growth trajectory. These companies are the middle segment of small businesses that are succeeding and growing. For this segment to be experiencing stress and indicating contraction, the health of small business is - as the Bloomberg headline suggests – in a state of “carnage.” Before reviewing the results from the Q2 2020 NCMM Market Indicators report, it is worth highlighting some things from the Q4 2019 report. Essentially, the NCMM companies were waving a caution flag going into 2020 before COVID due to the residual of the tariffs and trade war. This caution flag was evident in the title for the Q4 2019 report: “The Caution Bell Tolls.”  These fast-growing middle market companies dependent on trade, exports, and the importation of materials or components from Asia were reporting slowing revenue growth and rising costs that were causing them to adjust downward their 2020 forecasts.  In other words, things were not rosy heading into 2020. Now throw in the coronavirus and occupancy restrictions along with new supply-chain disruptions, and the sentiment by this segment of small businesses is “Unprecedented Times, and a Cautious Path Forward.”

Consider the following charts and ratios regarding revenue and employment from the latest report.

The first chart on the left shows the revenue picture – employment ratios are in the second chart on the right. Revenue is down another 3.7% despite the benefit of states reopening in May and June 2020 – and down almost 14% year-over-year. The forecast by these established and growing small businesses is for just +2% over the next 12 months versus their forecasts of +4.9% at year end 2019 and +5.4% a year ago. If COVID-19 remains out of control and additional fiscal assistance isn’t agreed to by Congress, these revenue forecasts will be revised lower in the Q3 report. With respect to employment, it is down by these growth companies by 4.4% year-over-year, and it is expected to remain in a contractionary mode over the next 12 months. In other words, rehiring or even new hiring is not in the foreseeable future.  Other charts and data in this Q2 2020 Indicators report relating to economic confidence and capital investment are equally as distressing.

American Bankruptcy Institute - ABI - Bankruptcy Stats by State

As noted at the onset of this WIN, not all small business closures result in a bankruptcy filing as many with 50 or fewer employees do not have bank debt and end up becoming a “silent failure.” As a result, the bankruptcy statistics are under-reporting the number of small business failures. In addition, many of the bankruptcies end up being Chapter 7 (liquidations as there are essentially little or no assets to offset debt). Chapter 11 bankruptcies are reorganizations and what you will typically find when there are assets greater than the debt.  It is important to look at the stats for both types by your state to appreciate the trends. Thus far in 2020, there has been an 25% increase in Chapter 7 and 11 bankruptcies. California, Florida and Illinois are the three states with the most bankruptcy filings YTD – each with more than 20,000.  Alabama ranks 23rd with just under 12,000 bankruptcy filings.

In summary, small businesses are under the most strain since the Great Recession - or arguably since record keeping began on them in 1973.  Regardless of the source or metric - ADP, Paychex, NFIB, NCMM or ABI - all are reporting the conditions are trending downward and worsening as the virus outbreak persists and new hotspots emerge in the South and West.  Follow these five resources to track how the small business dominos are falling in your region, state and industry sector. And what happens to small business greatly impacts state and municipal budgets later this year and in 2021. Connect the dots form last week’s WIN and this one.

ACRE remains committed to its COVID-19 coverage at to bring you the insights needed to Look Up & Forward and do the necessary “what if” thinking.



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