The 3% Annual Bump

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.

Published by

Chuck Berger

I am Director with Cushman & Wakefield's Global Supply Chain Solutions (CA Broker License #01359232). My passion is solving real estate problems for supply chain companies and investors.

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