In the primary industrial real estate markets in the United States, a strange phenomenon has taken shape through the past few market cycles. Market rental rate increases have found an almost uncanny stability across markets and property types. The 3% annual rental increase, while not an absolute, is so common in most top tier markets that one almost does not need to inquire about it-it is just assumed to be the case.
My question is not why this trend has happened. I am more interested in understanding why it has stayed consistently at 3% despite all the other lease elements adjusting with the market conditions. Low interest rates no doubt play a part. Obviously landlords are much more accepting of lower rental increases when there are few inflationary pressures, as their value of money would theoretically stay somewhat consistent.
However, I think the trend is tied more to custom rather than rationale. It’s easy to play along with the market and, if no one is objecting, toeing the status quo. I am not insinuating that landlord’s should ask for more than 3%. Obviously tenants are accustom to this structure in primary markets and would probably greatly resist a substantial deviation (or get it from the landlord “down the street”). But with such a tight market across the country for good quality distribution space, it is interesting we don’t see more landlords at least asking for more.