Rental Growth in an Office Acquisition Model
I'm following BIWS Real Estate Modelling course, specifically on an office acquisition for PERE firm. This is a basic question, but I'm confused about the rental growth in each future year.

Surely if the tenant agrees to lease space (say, at $22 psf) that figure is fixed for the duration of the lease. But in the model, rent growth is forecasted depending on assumptions, and the annual rent psf figure is therefore changing each year. Could anyone help clarify this to me?




[{"id": "duujvpk", "text": "In a commercial lease, rent usually increases during the lease term, it doesn\u2019t stay the same for the duration.", "replies": [{"id": "duul9tk", "text": "So when the tenant signs the lease they agree to pay the rent + annual rent growth which is agreed in the lease?", "replies": [{"id": "duvunkq", "text": "It may go up by a predetermined amount, or in preset relation to an index, each year or at another interval (e.g. every 5 years). ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "duujy4i", "text": "Are you using Argus? Generally office leases escalate either via an annual increase or a bump after 60 months. However, your market rent growth is applied to what you believe market rent to be for the space via the MLA (Market Leasing Assumption).  That is independent of the contract rent specified for the tenant. ", "replies": [{"id": "duukvnc", "text": "No, just in excel. So it's implied in the lease term that the rent grows annually at say the CPI rate (or whatever rate the landlord deems fair)?", "replies": [{"id": "duumx50", "text": "Yes. It\u2019s less often CPI in my experience and more often 2-3% per year or a larger rent bump in lieu of OpEx reimbursements", "replies": [{"id": "duvwm5l", "text": "I work in LA and I've seen up to 4% increases.", "replies": [], "depth": 4}], "depth": 3}, {"id": "duvg819", "text": "&gt; rent grows annually at say the CPI rate \n\nDepends on geography and product type, but generally it's a set rate increase in the lease. 3% annual increase or 2.5% annual increase for example.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "duvfqbj", "text": "It depends on the lease. Some leases will be flat throughout the term. Others will have increases each year, say 2%. Others may have a 10% increase every 5 years. Still others may follow the greater of a fixed percentage or CPI. There are a number of different ways to do it.", "replies": [], "depth": 1}, {"id": "duvg5k2", "text": "&gt; if the tenant agrees to lease space (say, at $22 psf) that figure is fixed for the duration of the lease\n\nThis is an incorrect assumption. Sometimes rent is flat for the term, but it is common for their to be an annual escalation to the base rental rate.", "replies": [], "depth": 1}, {"id": "duvyq5m", "text": "Long term Retail leases are more commonly flat for 5 years then followed by 5-10% escalations.  Office and Industrial leases are more typically 2-3% depending on the tenants credit strength.  \n\nIn some situations where the landlord deeply discounts the first year\u2019s rent then you\u2019ll see larger yearly escalations to make up the discount in later years.  \n\nCPI is hardly used because it\u2019s a managing and accounting nightmare to agree on how the index is applied.  ", "replies": [], "depth": 1}, {"id": "dvtj0uc", "text": "I am not sure how are things working in America, but in Europe, Landlors usually put a indexation clause in the contracts, which enables them to increase the rent for the consumer price index (fancy name for inflation), and that percent is published by EUROSTAT. \n", "replies": [], "depth": 1}]