CRE glossary
Escalation (annual rent increase)
Rent escalation is the contractual mechanism for increasing base rent over the term of a commercial lease. The four common structures are fixed annual percentage (most common, 2.5–3.5% per year for office), step rent (defined dollar increases at fixed intervals), CPI-indexed (rent rises with inflation, usually capped), and fair-market revaluation (rent resets to market at predefined milestones).
Fixed percentage escalations are dominant in office and retail. The number is set in the LOI and compounds annually. A $58/SF rent at 3% becomes $59.74 in year 2, $61.53 in year 3, and so on. By year 7, a 3% escalator on $58 results in $71.30/SF, a 23% increase over year 1.
CPI-indexed escalations are common in long-term industrial leases and ground leases. The rent rises with the Consumer Price Index, which protects the landlord against inflation. Tenants should always negotiate two protections: a cap (typically 5–7% per year, ceiling on the increase) and a floor (sometimes 0%, sometimes a guaranteed minimum like 2%). Without a cap, a high-inflation year produces ugly rent jumps.
Fair-market revaluation appears in renewal options and some long-term ground leases. At a defined milestone, the rent resets to the current market rate, determined by appraisal or by the parties' brokers' opinions of value. This is the highest-risk structure for tenants and the most negotiated clause in any renewal, get the appraisal mechanism (which appraiser, what comps, what process) locked down precisely.
Compounded base rent in year N
Rent_N = Rent_1 × (1 + r)^(N−1)
Example
- Year 1
- $58.00/SF
- Year 4 (3% annual)
- $63.38/SF
- Year 7
- $71.30/SF
- Year 10
- $78.13/SF
Broker perspective
Tenants always undercount the cumulative cost of escalations. A 3% escalator looks small, it's not. On a 10-year deal with a $60 base, the tenant will pay $79.80/SF in year 10. Always show tenants the full rent schedule across the term, not just year 1. DealDesk's LOI Builder generates the rent table automatically.
Frequently asked
People also ask
What's a typical office escalation?
3% fixed annual is the modern standard for Class A office in tier-1 markets. 2.5% in softer markets. CPI-indexed is rare for office, more common in industrial.
Should I negotiate a CPI cap?
Always. 5–7% per year is market. Without a cap, a single high-inflation year can create a permanent step-up the tenant can't recover from.
What's a step rent?
Defined dollar increases at fixed intervals (e.g., +$2/SF every 3 years) instead of percentage compounding. Easier to budget; less flexible than fixed-%.
Are escalations negotiable?
Yes, same as any economic term. In strong tenant markets, push for 0% escalation in years 1–2 (effectively more free rent) or step structures with longer intervals.
Related terms
Base rent
The headline rent before pass-through expenses, usually quoted in $/SF/year and the starting point for every comp.
Free rent (abated rent)
A period at the start of the term where the tenant pays no base rent, used to offset move-in costs and competitive pricing.
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.
See escalation (annual rent increase) extracted from a real lease.
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