The Grand Hotel in Bowral closed indefinitely last week due to rental increases.

It is understood the pub could be converted into retail shops.

The pub has operated in the Highlands for 126 years and it was the second hotel to be built in Bowral, originally named the Grand Hotel and Motel.

Neighbouring business owner of Café Rocca Michael Abouchabake said it was sad to see the business close after working alongside it for 18 years.

"I have always had a good relationship with the hotel and its owners," he said.

"We all got along with each other and complemented each other.

"It's sad because it's a town icon. I think it does our town injustice not having it there.

"People knew about the Grand Hotel and people have always known about it.

"It will be really sad if it closes for good.

"I am yet to know if whatever goes into that space will affect my business."

The building is privately owned and part of the footpath out the front of the hotel is council owned land.

Owner of Rush Roasting in the Grand Arcade Leisa Tozer said it was a shame to see another small business closing in the township.

"We're paying Sydney rents without the foot traffic," she said.

"Small sole traders are going broke because of the high rent.

"We're becoming a ghost town, and if all the big shops start filling up the street, why would people come to Bowral for retail?

"It's just such a shame to see such a big space empty."