Inflation is dead, long live inflation. The latest release of inflation numbers shows that inflation for the year ending March 2025 for the basic items actually declined 0.1%, a sharp contrast to only 2 months ago when inflation was the top story and everyone was worried about skyrocketing egg prices. This article explores the changes in inflation, which are an important part of any commercial lease, and how that affects landlords and tenants who lease commercial space. Let's get started.
The start of 2025 saw inflation for January skyrocket up 0.5%, but then drop in February 0.2% and go negative in March with prices actually declining 0.1%. There is no defined trend yet, so let's examine what history tells us.
Since 1914, when we first started keeping records, inflation has averaged 3.3%, and since 2010 averaged 2.6%, but since 2020 averaged 4.2%, due to one 8% year during COVID. The conclusion from the data is that inflation should be expected to be around 3% per year, and we should recognize that the last 5 years has not been normal.
Inflation is measured by the Consumer Price Index and, if you are a landlord or a tenant, your lease defines how much more rent is paid every year based on that number. Just 3 years ago, inflation was 8% and landlords reaped the benefit of much higher rents in 2023. But 2022 was the year we experienced extraordinary economic imbalance due to Covid, suffering supply chain shortages exacerbated by consumers spending wildly, resulting in the classic free market supply/demand curve with prices increasing. But in 2025, things have changed.
If you are a landlord or a tenant, your lease should include language that states rent will increase with inflation. If you have a really good lease, it will be clear about how inflation is calculated and what inflation index is used. The problem is that inflation is measured 8 different ways and includes prices of thousands of items. While the inflation number for the 12 months ending March 2025 was only 2.4%, many of the costs that landlords pay have increased much more than that, such as electricity, property taxes and hazard insurance.
For example, if you are a landlord in New Orleans, congratulations because the 14% increase in property taxes was the largest increase of any city in the United States, and that is on top of a 37% increase last year in New Orleans/Metairie insurance costs for office properties. The table below shows all the major components of the Consumer Price Index, Food, Energy, and the third category: All items, less Food and Energy, but the data show about many categories increased prices much more than the average. The result is that a lease doesn't always protect a landlord or tenant from rising costs just because rents are adjusted for the sum of all these categories.
Most landlords require language in their leases which allow for rents to increase based on inflation, but also allow rent to increase at a minimum rate. A good lease will have specific language that explains how the inflation number is derived, such as:
" At the end of the initial term, there shall be an annual reevaluation and increase of the basic rent based on the Cost of Living Index as published by the U.S. Department of Labor, Consumer, Price Index for Urban Wage Earners and Clerical Workers, U.S. City Average. However, under no circumstance is the base monthly rent to increase not less than three percent annually."
Another way landlords protect themself is to reduce the base rent but pass along the property taxes and insurance to the tenant in a triple net lease. This means the tenant would need to agree to incur the risk of the higher than normal increases. Many times, however, this would make the property unattractive to a tenant and price the space out of the market.
Tenants protect themselves by negotiating language in their lease which puts a cap on operating expenses that can be passed along from the landlord. Sometime the language states that there is a cap on controllable expenses, such as landscaping, but the lease may state there is no cap on uncontrollable expenses, such as property taxes and insurance. So that doesn't really help a tenant.
In summary, all lease language can be negotiated and a tenant has the most power to force changes in the lease language during the dating period, not after the marriage. The bottom line for tenants is to make sure you have a trained negotiator on your team.
For more information on how inflation is measured, read our blogs:
Worried About Inflation? It's Not The Eggs, It's Auto Insurance
The Critical Item In Your Lease Is Not The Price But The CPI
