CPI Inflation shows how the value of a real estate investment can change over time because of inflation. The Consumer Price Index is the cost of a basket of goods/services in the current year the price of the same basket of goods/services in the base year purchased by a family of four.
The annual inflation rate is one of the most known indicators in economics. The inflation rate is the percentage change in the CPI index rate. Using the CPI index, you can determine the impact that inflation has on the value of property over a specific time. (CPI inflation rate = CPI in target year-CPI in reference year) / CPI in a reference year X 100.
CPI Inflation-What does it mean to Commercial Real Estate?
It is simply, inflation decreases the value of the money you receive on a commercial lease. Most long term commercial leases have a CPI clause that will keep the value of the dollars you receive today the same as the day the lease was entered into. Some times tenants negotiate a “cap” in the amount of increase allowed. In the 1970s a CPI clause was essential to protect the value of the commercial property for the investor. In recent years inflation has been relatively low and has been of little consequence. But with all the deficit spending by the Federal Government and Huge infusions of cash by the Federal Reserve, it is almost certain, inflation will be raising its ugly head again. Making it important to any investor of commercial real estate the value of a CPI clause in their commercial leases. Below is a CPI Inflation calculator to help landlords and tenant to calculate the percentage increase that inflation will have to base rent.