Graduated rents increasingly displace indexed office leases

19. August 2022
Posted in What's New
19. August 2022 admin

Graduated rents increasingly displace indexed office leases

The increased inflation rates are likely to lead to a noticeable rent increase for many office users. According to an analysis by JLL, almost all office leases concluded in recent years contain so-called adjustment clauses. “These are partly graduated rents, but more than 80 percent agreements that provide for the adjustment of the rent to the development of the general cost of living,” explains Helge Scheunemann, Head of Research JLL Germany. In almost all cases, the consumer price index of the Federal Statistical Office is used as a basis.

JLL has evaluated indexed leases with a total area of more than 6.3 million m², which are located in almost 900 office buildings nationwide. 82 percent of the rental space is accounted for by contracts concluded in 2010 or later, 45 percent in 2018 or later, and 21 percent in 2020 or later.

The wide variety of indexation clauses is striking. A total of almost 100 different agreements were registered in the sample. “With a share of 40 percent, the rule dominates that every year the inflation rate is completely added to the rent,” reports Scheunemann.

However, there are often hurdles before indexing takes effect. In 19 percent of the cases examined, the underlying price index must have risen by five percent before a rent adjustment occurs. In every tenth case, the hurdle is even ten percent. Rather the exception, however, are adjustments every two years or capped rent increases to 50 or 70 percent of the inflation rate.

“About ten years ago, hurdles in indexing were common standard,” says Scheunemann. However, the more the office markets developed in favor of landlords, the more often full indexations were found in the contracts, which was due to the increased bargaining power of the landlords. “This was particularly evident in the German office strongholds in 2019 and 2020, when fully indexed leases accounted for 47 percent. In previous years, it was only 36 percent,” Scheunemann compares.

With inflation rates rising sharply this year, the tide seems to be turning. Scheunemann assumes that almost every lease agreement will continue to contain an adjustment clause in the future. However, the increasing supply of space will put tenants in a better negotiating position than a year or two ago. “This is likely to lead to an increase in the willingness on the part of the owners, especially for large leases of 5,000 m² or more, to agree on graduated rents, especially in the case of large leases from 5,000 m², instead of demanding full annual indexation. This takes the risk away from the tenants and gives the owners security in the calculation.”