Commercial real estate segments: offices, logistics, retail, data centres

What you will learn

• How offices, logistics, retail and data centres differ in tenants, leases and demand drivers
• How to calculate gross and net initial yield and the weighted average lease term (WALT)
• How lease indexation and re-letting costs change the income you can expect
• Why small changes in market yields cause large changes in commercial property values

Explanation

Commercial real estate means property let to businesses rather than households. Most private investors reach it indirectly, through REITs, listed companies or open-ended funds, so understanding the segments helps you read what these vehicles actually own.

Key lease terms

• Gross initial yield = annual contracted rent ÷ purchase price.
• Net operating income (NOI) = rent minus costs the landlord cannot pass on to tenants (non-recoverable costs), such as some maintenance, management and vacancy costs.
• Net initial yield = NOI ÷ purchase price. Professional buyers often also add purchase costs to the price; always check which definition is used.
• WALT (weighted average lease term) = the average remaining lease length, weighted by each tenant's share of rent. A short WALT means more income is up for renewal soon.
• Indexation: many German commercial leases link rent to the consumer price index (Indexmiete), fully or partly. This protects income against inflation, but only if the tenant can afford the increase.

The four segments

Hotels, healthcare properties and student housing are further niches; they depend strongly on the operator's business and often behave more like operating companies than like simple landlords.

Valuation and yield changes

Valuers often estimate value as Value = NOI ÷ market yield. The market yield (also called capitalisation rate) reflects interest rates and the perceived risk of the segment. Because yields are small numbers, a rise of one percentage point can cut values by a fifth or more, even when the rent does not change at all.

Worked example

Hypothetical example: An office building is bought for €24 million. Contracted rent is €1.2 million per year; non-recoverable costs are €120,000. Purchase costs, taxes and financing are excluded.

1. Gross initial yield = €1.2m ÷ €24m = 5.0%.
2. NOI = €1,200,000 − €120,000 = €1,080,000; net initial yield = €1.08m ÷ €24m = 4.5%.
3. Tenants: A pays 50% of rent with 2 years left, B 30% with 6 years, C 20% with 10 years. WALT = 0.5 × 2 + 0.3 × 6 + 0.2 × 10 = 1 + 1.8 + 2 = 4.8 years. Half the rent depends on one renewal within two years.
4. Indexation: inflation is 3% and the lease is 100% indexed. New rent = €1.2m × 1.03 = €1.236 million.
5. Yield shift: the market yield for such offices rises from 4.5% to 5.5%. Value = €1.08m ÷ 5.5% ≈ €19.64 million, a fall of about 18.2% with unchanged rent.
6. Re-letting risk: if tenant A leaves, half the rent (€600,000) is lost for, say, 12 months of vacancy, and a new tenant asks for six months rent-free (€300,000). Lost income ≈ €900,000, before fit-out costs.

Common mistake

Practice activity

Hypothetical logistics hall: price €18 million, rent €900,000 per year, non-recoverable costs €54,000. Two tenants: 60% of rent with 3 years left, 40% with 8 years left. (a) Calculate the net initial yield and WALT. (b) What is the value at a market yield of 4.7%, and at 5.2%? By what percentage does the value change?

Key takeaways

• Each segment has its own demand drivers: employment for offices, goods flows for logistics, consumer behaviour for retail, power and technology demand for data centres.
• Use net initial yield, WALT and tenant concentration together; a yield alone says little.
• Indexed leases protect income only as long as tenants can pay.
• Because value ≈ NOI ÷ yield, small yield changes cause large value changes.

Next step

Next, you will get a general orientation on how property income and property sales are taxed in Germany.