CRE glossary
CPI escalation
A CPI escalation is a rent-increase mechanism tied to the Consumer Price Index. Rent rises each year by the CPI percentage change over the prior year. CPI escalations are most common in long-term industrial leases and ground leases; tenants should always negotiate a cap (5–7% per year) and a floor (0–2%) to protect against inflation extremes.
CPI is calculated by the Bureau of Labor Statistics and published monthly. Lease typically uses CPI-U (urban consumers) for the relevant metro area. The trigger date is set in the lease, usually the lease anniversary, and the increase applies for the upcoming year. A 4% CPI year produces a 4% rent increase the following year.
Without caps, CPI escalations are catastrophic in high-inflation periods. The 2021–2022 inflation cycle hit 7–9% in some quarters; a tenant with uncapped CPI escalation would have seen rent jumps of 7–9% per year. With a 5% cap, the same tenant pays 5%, material savings. Always cap.
CPI floors prevent rent decreases in deflationary periods. Most landlords negotiate a 0% floor (rent never decreases) or a guaranteed 2% minimum increase. A 2% floor protects landlord cash flow in low-inflation environments and is standard in institutional leases.
CPI escalation
Year N rent = Year N-1 rent × (1 + min(CPI%, cap%))
Example
- Year 1 rent
- $58.00/SF
- Year 1-2 CPI
- 3.2%
- Year 2 rent (uncapped)
- $59.86/SF
- Year 2-3 CPI (high inflation)
- 7.5%
- Year 3 rent at 5% cap
- $62.85/SF
- Year 3 rent uncapped
- $64.35/SF
Broker perspective
Tenants almost always undercap CPI escalations. 7% is too high. 6% is acceptable. 5% is good. 4% is great. Cap exclusions for 'pass-through expenses' (like utility costs) are reasonable; cap exclusions for base rent are not. Push back hard on uncapped CPI in any office or retail deal.
Frequently asked
People also ask
What's a typical CPI cap?
5% per year is market for office and retail. 7% for industrial. Caps over 7% are uncommon and tenant-unfriendly.
Should I negotiate a floor?
Most landlords insist on a 0% floor (rent never decreases) or a 2% guaranteed minimum. Hard to remove entirely.
Which CPI index do leases use?
Usually CPI-U (urban consumers) for the relevant metro area. CPI-W (wage earners) is occasionally used. Confirm in the lease.
Is CPI escalation common in office?
Less common than fixed-percentage escalations (3% per year). More common in long-term industrial and ground leases where inflation protection matters more to the landlord.
Related terms
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Escalation (annual rent increase)
The mechanism for increasing base rent over the term, fixed percentage, CPI-indexed, or stepped.
Ground lease
Long-term lease (50–99 years) of just the land, tenant builds and owns the building on top.
Letter of intent (LOI)
A non-binding outline of the major business terms, rent, term, TI, options, that becomes the basis for the binding lease.
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