Rent Escalation
Scheduled rent increases built into a lease, typically expressed as a fixed percentage or dollar amount applied annually.
Definition
Rent escalations are contractual increases in base rent over the lease term. They protect landlords against inflation and rising market rents while providing tenants with predictable cost increases. The most common structures in small bay industrial are fixed percentage increases (typically 2-3% annually) or fixed dollar amounts ($0.25-0.50/SF per year). Some leases tie escalations to CPI (Consumer Price Index), though this is less common due to administrative complexity. Escalations compound over multi-year leases, so a 3% annual increase results in 15.9% higher rent by year five. Well-structured escalations keep rents close to market rates and maintain property value at lease expiration.
Example
A tenant signs a 5-year lease at $12/SF with 3% annual escalations. Year 1: $12.00, Year 2: $12.36, Year 3: $12.73, Year 4: $13.11, Year 5: $13.50. Over the lease term, they pay an average of $12.74/SF.