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**This research piece is created with CompStak’s exclusive data

As a follow-up to KC Conway’s blog, CRE Headwinds – Rising “IRE”: Inflation, Interest Rates, and Employment Cuts, this week CompStak is presenting four CRE trends to watch during this period of rising “IRE” based on CompStak’s best in class industrial and office lease transaction data. This week we are covering two trends in the industrial space—stay tuned next week for two trends to watch in the office market. 

Interested in hearing more on these topics? Please join us on September 15 for a webinar featuring Michael Mandel, CEO of CompStak and KC Conway, Principal/Co-Founder, Red Shoe Economics.

Are Lease Escalations Increasing in Industrial Deals During This Period of Rising Inflation?

The industrial real estate market has accelerated dramatically through the pandemic, as an increase in e-commerce and supply chain pressures pushed demand for space and rents to new heights. To date, industrial rents have shown few signs of deceleration as a result of economic factors. In fact, many markets have experienced industrial base rent growth year over year, outpacing inflation.

CompStak’s lease transaction data shows that annual escalations built into industrial leases are on the upswing. CompStak evaluated annual escalations for industrial transactions in select major markets including Los Angeles – Inland Empire, Atlanta, Northern and Central NJ, Chicago metro, Philadelphia, Central PA, Southern NJ, Delaware, and Dallas-Fort Worth and found:

  • The share of industrial transactions with annual escalations above 3 percent has increased steadily since the beginning of 2021.
  • In 2017 to 2021, the median annual escalation was 3%, but in 2022 to date, it has increased to 4%.
  • At the same time, the 12-month percentage change in CPI, has been on a steep climb upwards since the beginning of 2021—it has been above 4% for the last 16 months.

How do rising expenses and inflation impact the most common lease type in industrial -the triple net lease?

Triple net is the most common type of lease type in industrial real estate. Traditionally, the triple net lease becomes less attractive during periods of rising inflation as longer term lengths do not allow landlords to adjust rents upwards to match or chase inflation. On the other hand, the triple net lease passes operating expenses and maintenance costs to the tenant, an advantage to landlords in a period of rising costs and inflation. In the industrial market, cap rate compression for single tenant net lease properties reached historic lows in early 2022, but experts warn this trend could soon reverse due to pressure from rising interest rates. 

CompStak’s industrial transaction data demonstrated the following:

  • Triple-net, single tenant industrial base rent growth outpaced that rent growth for all other deals in the prime industrial markets analyzed. 
  • The spread in base rents widened from 2020 to 2022 year to date between triple-net, single tenant deals and all others, despite increasing expenses for tenants—in 2022 to date, the average base rent for a single tenant, triple net lease was about $2.00/SF higher than all other deals

Stay tuned for next week’s key office trends to watch.

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