Are Commercial Tenants in for a Surprise?
In early January, we learned that the inflation rate reached a staggering 7%, the highest rate since 1982. Analysts blamed many things for this increase. COVID and supply chain issues are cited as two of the leading causes. I don’t suppose it matters much to the average person why everything costs so much. We all just know prices keep going up.
I didn’t give it much thought until last week when one of my shopping center clients sent me a letter of intent for a new tenant that included a CPI rent adjustment provision. While it certainly isn’t unusual for commercial landlords to ask for rent increases to be the greater of x% or year over year increase in CPI, I was actually floored that a new tenant would agree to this provision given the recent inflation announcement. Why agree to the greater of 3% or CPI when we know that CPI today is 7%? For the last 40 years CPI has been well below the 3% so it has been easy for tenants to agree to a CPI clause. But today, a new tenant is agreeing to increase rent next year by 7%. This tenant must have real faith that the president and Congress are going to actually talk and institute policies to get inflation under control by the time of the first rent increase next year.
That got me to thinking about all of the leases out there with CPI clauses and rent increases coming due right now. Tenants that have been used to routine 2% to 3% increase per year are going to be in for a big surprise when the bill comes due with a 7% increase over the coming months. What’s worse, if the situation does stabilize, the base is set. Rent will not revert back to the pre-inflation spike rate.
Tenants, plan accordingly and landlords, check your leases. If you have CPI escalation rights, calculate accordingly.