Inflation has climbed at its fastest pace in 13 years. The current inflation rate combined with post-pandemic supply challenges has significantly altered the commercial real estate playing field. If you’re thinking about adding a triple net property to your commercial investment portfolio, it’s imperative to consider three important key factors in light of the high inflation rate. These factors are: lease terms, fixed rental escalations, and the in-place lease rate compared to prevailing market rental rates.
The consumer price index (CPI) rose 0.9% in June, exceeding market estimates. The CPI has risen 5.4% in the last 12 months, which is the largest jump since 2008. Although inflation can be advantageous for real estate investors due to lack of competition from new construction, investors should be aware of the rent schedule over the total term of the lease. Investors should make sure their leases will contain rising rents to maintain the value of the building.
Lease Terms, Fixed Rental Escalations and Reasonable In-Place Rental Rates
- Fixed Rent Escalation: Leases should contain either annual rent increases or staggered rent escalations every 5 years to keep up with current market rental rates. Each schedule has their benefits and should be considered on an individual basis. Premiums shall be placed on properties with strong rental increases.
- Using CPI as a Rental Rate Base Line: Investors should consider leases that use a CPI baseline to help keep rental rates in-line with the unknow market. For example, if CPI increases faster than 3% per year (or some agreed number), the rental escalations would be the greater of the CPI increase or an agreed fixed percentage.
- In-Place Rental Rates: Confirming the buildings rents are at market will ensure that the rents can rise with inflation or be replaced if needed.
According to a recent Wall Street Journal article, “Owners of residential and commercial real estate are often better off during times of rapid inflation than owners of stocks or bonds, economists say.”
While inflation is important to consider, always buy commercial real estate in the best locations, with the best tenants that are paying market (or below) rental rates. This will help solve any unknowns that come about due to higher inflation. If you’re interested in purchasing triple net properties for sale, our team is here to help. We have an extensive track record of success, particularly in the Rocky Mountain region. With more than 675 investment properties sold nationwide and 70+ years of expertise in the commercial market, we’re confident in our ability to connect you with your ideal property. Interested in learning more about our process? Please contact us to get started.