Inflation is in the news and on a wild ride. 2022 has had the highest inflation since the 1980s. How does all this affect Postal Lessors?
In its August 2022 report, Inflation and the US Postal Service, the USPS Office of the Inspector General discusses the effects of inflation on the US Postal Service. In that report, the Postal Service’s costs are divided into three categories: Labor – composing about 70% of costs; Retired Workers and Workman’s Compensation- composing about 10% of costs; and Purchased Goods and Services – composing about 20% of costs.
The cost of postal leases falls under the third category along with fuel and supplies. While the costs of fuel and supplies have an immediate impact, the costs of leases to the USPS are slower to show their effects. Those effects are dependent on the length of the lease term and the period of time until the next lease negotiation. In FY 2021, the Postal Service leased over 23,000 properties, at a cost of $1.17 billion. Over the next five years, most of those leases will be renewed or rewritten, creating a substantial increase in lease costs.
For lessors whose leases are up for renewal soon, (see Summer 2022 Newsletter with additional information) it is important to add a rent escalator to protect against rising lessor costs. (See newsletter article with additional information.) Alternatively, the USPS may exercise previously agreed upon Renewal Options which may not include such escalators. In that case, the lessor has no recourse but to accept the Renewal Option.
In the case of lessors whose lease renewal terms are complete, and are looking at a new lease, this is the time to be aware of the additional costs associated with inflation, and to make an educated guess as to how that will affect future profitability. Including the costs of future maintenance, insurance premiums, utilities
Neither the lessor or the USPS is certain of what is in store in terms of inflation over the next five years, and each will be working to determine a fair value for rents based on their own projections.
Additional information: Government Executive article.