Yield in commercial real estate: how to calculate correctly and what counts as good
Gross versus net, vacancy and owner expenses: how to calculate true yield on an office for investment, and why 6%–8% net is considered a healthy range in the office market.
Gross yield: the figure that's easy to calculate and easy to mislead with
Gross yield is annual rent divided by purchase price. A property bought for 4.25 million ₪ and leased at 26,500 ₪ per month yields approximately 7.5% gross.
The problem: this figure ignores owner expenses and vacancy periods. Two properties with the same gross yield can generate completely different net income.
From gross to net: what gets deducted
Vacancy: even a sought-after property stands empty between tenants. Standard practice in commercial real estate is 5%–10% downtime. Property insurance, repairs and wear, management fees during vacancy and tax when there's no tenant — all fall on the owner.
Property management: even if you manage yourself, your time has a cost. Institutional investors price management at 2%–5% of income.
What counts as good yield in the office market
In the Israeli office market, net yield of 6%–8% is considered a healthy range for a quality property with a stable tenant. Below 5% — the property is priced high relative to income, and usually embeds a bet on appreciation or an exceptionally strong tenant.
Yield above 9% almost always tells a story: weak area, aging building, risky tenant or short lease. High yield is compensation for risk — not a gift.
Tenants: the foundation of the calculation
A property is only as good as its tenants. A blue-chip company on a 5-year lease is worth more to an owner than a small business on a one-year agreement, even if the monthly rent is identical.
Equity investors use a "tenant risk premium" — they discount income from new or small tenants by 10%–20%, and add a bonus for multinational creditworthiness. The market prices this in the transaction itself.
Net yield over time: what actually happens
A 6% net at purchase becomes 7%–8% as the mortgage is paid down and capital grows. After 10 years, an investor who bought at 4.25 million with a 30-year mortgage is generating 8%–10% yield on original capital — in a stable, rent-indexed asset.
This is why office property appeals to long-term investors. The yield grows slowly, but steadily, with low volatility — very different from the stock market.
This article was written with the help of artificial intelligence and may contain inaccuracies. It should not be regarded as professional, legal or financial advice.
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