April 2009

    

    

Strictly Commercial

Baltimore Commercial Real Estate News and Opinions

 

Is inflation about to rear its ugly head?  Plenty of economists think so.  There has been minimal rent inflation for almost 30 years.  Our last bout with inflation in the 15 to 20 percent per year range on a national level ended with the Carter Administration in 1980.  Most recently, 3 percent annual rent escalations have been the norm. 

 

Presently, borrowing costs are at historic lows.  But many loans have balloon provisions that allow the lenders to re-negotiate terms and interest rates after an average of 5 to 7 years.  Lease terms with options, on the other hand, can carry on for 10, 15, 20 years.  Given the inflation risk, is it smart now for landlords to commit to 3 percent annual increases especially going out the later years?  We think not!

 

How can landlords avoid the inflation trap?  One alternative:  demand market rate increases in the later years.  The problem with market rate increases is that tenants don’t like them.  Tenants need stability in their rent structure and market rate increases do not satisfy that need.

 

Here is another suggestion.  Add an Inflation Clause to your lease.  The emphasis of an Inflation Clause would be to cover big increases in the Consumer Price Index by placing a ceiling on your exposure.  With a CPI ceiling of say 5 percent, for example, the landlord could offset a 10 percent increase in inflation in the future by having the tenant make up the difference.

 

The Inflation Clause shares the risk of inflation with the tenant.  As long as inflation says below the ceiling, the tenant has nothing to loose.  Tenants get the stability in their rent structure they desire.  Landlords are protected if inflation rears its ugly head.

 

Contact Mitch at [email protected] and share your thoughts with him.

 

We are pleased to announce that we have assisted in the following transactions:

 

·         Three office leases at 301 Main Street, Reisterstown.  Welcome to Glyndon Arts, Transatlantic Mortgage and Advanced Research Information.  Alan Hoolin was instrumental in these leases.

·         Autopart International leased two new locations:  10,000 sf in Hyattsville and 5,000 sf in Laurel.  Jim Chivers worked on these deals.

·         United Distributing leased 4,600 sf of office space at 616 Main Street, Reisterstown.  Jim negotiated on behalf of the tenant.

·         Pilgrim Shoes expanded their premises by 4,700 sf at 1817 Whitehead Road.  Alan Hoolin put that deal together.