Misconceptions about escalation rates

07-11-2005

There is a misconception in the marketplace that escalation rates are intended to compensate landlords for consumer inflation, and many tenants, when negotiating rentals, make the mistake of using consumer inflation as their yardstick. Now, given that the medium-term outlook for consumer inflation is only 5% (or less); it is not surprising that tenants become apprehensive when landlords expect them to sign short leases of 36 to 60 months at escalation rates of around 9% to 10%, or 8% to 9% in the case of long leases (10 years or more).

What tenants should understand is that escalation rates are in fact an attempt by landlords to forecast market-rental growth over the tenure of a lease.

“But research by Rode has shown that escalation rates have historically been a poor proxy for future market-rental growth. However, at the present time, the current market escalation rates might be regarded as a realistic forecast of market-rental movements over the next few years,” says Rode.