Increase in ILAT
Quote or short catchphrase, short sentence or paragraph (> Always end sentences, even subheadings, with a period).
With the steady rise in the Service Sector Rent Index (ILAT), companies renting office space, particularly in the Paris region, are seeing their costs rise.
It may seem a technical subject, but it's one that CFOs need to focus on, because it has a direct impact on cash flow and budgets.
Analysis of a phenomenon and solutions for dealing with it.
Michael Kaplan
Associate
Vincent Ternynck
Real Estate Services Director
An increase that weighs heavily
Since 2018, ILAT has recorded an increase of 21.62%, rising from 112.74 inQ3ᵉ 2018 to 137.12 inQ3ᵉ 2024.
This index, which adjusts rents for tertiary activities, follows inflationary trends and reflects the cost of construction and economic growth.
Let's take a concrete example: a company signing a lease in 2018 for an annual rent of
300,000 €.
With the evolution of the ILAT, its rent for 2024 will reach 364,875€, i.e. an increase of +64,875€.
Why is ILAT rising so fast?
Historically, ILAT was supposed to be less volatile than ICC (Indice du Coût de la Construction), long used to index commercial leases.
ILAT is based on a mixed basket including inflation (Consumer Price Index), the cost of new construction and Gross Domestic Product (GDP) in value terms. This combination was intended to mitigate extreme variations, unlike the ICC, which is based solely on the cost of construction.
Currently, ILAT is particularly sensitive to economic fluctuations, due to the combined effect of several factors:
- Inflation, which remains high since 2021, fueled by rising energy and raw material prices.
- The cost of construction, impacted by rising materials prices and environmental constraints.
- Changes in GDP, which reflect an uneven economic recovery and influence.
This dynamic highlights a central issue for companies: how to absorb these increases while other operating expenses are also rising?
Major risks for tenant companies
The impact of the ILAT increase goes beyond rents. Several risks are looming for tenant companies:
- Increased financial pressure
Unanticipated rent increases can reduce companies' investment capacity and affect their cash flow.
- Unpredictable budget
ILAT's high volatility complicates budget planning, making financial projections less reliable.
- Reduced margins
Real estate often represents the second largest expense item for companies, just after salaries. In a tense economic environment, where cost control is essential, a 20% increase in an expense item as strategic as real estate can weigh heavily.
How to adapt?
To cope with this increase, it's in companies' best interests to adopt a proactive management approach. Here are a few avenues to explore:
- Anticipate in budget forecasts
CFOs need to incorporate expected ILAT increases into their budgets. With an average annual increase of 3-4%, planning ahead over 3 to 5 years becomes crucial.
- Negotiate leases
When signing or renewing a lease, negotiate more protective clauses, for example by capping indexation (e.g., at 2-3% per annum upwards or downwards).
- Optimize the use of office space
With the spread of telecommuting and hybrid ways of working, the question of leased space is essential. Reducing a €364,875 rent by 10% saves €36,487 a year in rent alone. Controlling floor space will also save on charges and taxes.
- Diversify locations
If business permits, explore locations outside the most expensive areas of the Paris region. Some locations offer more affordable rents, with lower indexations.
A challenge, but also an opportunity
The ILAT increase is a reality that all companies have to face.
While the risks are considerable, they can be transformed into opportunities. Optimizing space, renegotiating lease clauses, or even reinventing real estate organization are all levers that can be used to lighten this burden.
To remain competitive, companies need to adopt a proactive and strategic approach. Above all, they need to bear in mind that real estate, although costly, can be a lever for attractiveness and performance, if carefully managed.
IN BRIEF
- ILAT has increased by +21.62% since 2018.
- A company with an annual rent of €300,000 in 2018 could pay €64,875 more in 2024.
- Solutions lie in anticipation, negotiation and optimization of leased space.
Acting now is essential to limit future impacts and better control costs.
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