Prime yield
Prime yield is the lowest yield in the market, and it applies to the very best buildings: new or recently refurbished, the best locations, long commercial lease contracts with solid tenants, often with an anchor tenant of institutional quality. Prime yield is used as a reference point for the whole commercial property market and is published quarterly by segment (office, retail, logistics, hotel) and by submarket.
The term "prime" has no formal definition in Norwegian regulation. It is an industry term that broker houses such as Akershus Eiendom, Newsec and DNB Næringsmegling define using a handful of qualitative criteria. A prime office building in Oslo is typically in Vika, Aker Brygge or Bjørvika, was built or fully refurbished in the past 5 to 10 years, has a WAULT of 9 to 12 years, low vacancy and lets to large, well known companies. For prime retail, it is about city centre retail on the best street addresses or dominant shopping centres. For logistics property, it requires modern facilities close to E-roads, a ceiling height of 10 to 12 m and long triple net contracts.
Prime yield sits lowest in the curve because the risk premium is smallest: buyers accept a lower running return because the cash flow is predictable, the tenants are solid and liquidity is high (such buildings can be sold in most market conditions). The distance between prime and secondary yield, the yield gap, says something about risk appetite in the market. A wide gap signals that investors are fleeing to safety, a narrow gap that capital is willing to take risk for a marginally higher return. In Norway, the gap has historically varied between 100 and 250 basis points between prime and secondary office in Oslo, but the levels vary with the economic cycle and must always be checked against the latest market report.
Secondary yield applies to buildings with one or more weaknesses: an older year of construction, a less attractive location, a shorter WAULT, less well known tenants. Tertiary yield applies to the weakest segments (peripheral buildings, worn standard, high vacancy, contract expiry close at hand) and can sit several hundred basis points above prime. A building does not move automatically into the prime segment after an upgrade: the industry uses the expression "going prime" about the repositioning, and it often requires both a physical upgrade, a new letting strategy and that the market accepts the location.
Prime yield is also used as an input value in the valuation of prime buildings under direct capitalisation: market value ≈ NOI / prime yield. The sensitivity is large: a change from 4.0% to 4.25% prime yield gives roughly a 6% fall in value on the same NOI. Small changes in the market reports from the broker houses therefore move billions in institutional portfolios overnight. Prime yield mainly follows the government bond rate with a risk premium added, but the gap between the interest rate and the yield can widen or compress based on access to capital and rental price development.
In Placepoint you can compare location, year of construction, tenants and contract terms from the property panel when you assess for yourself whether a building qualifies for the prime segment or should be priced at a higher risk premium.
How it looks in Placepoint
In Placepoint you find this in Property panel - Units and Tenants:
From Placepoint's dictionary: Prime yield
More information: Eiendom Norge: Market reports, Akershus Eiendom: Market Report, Newsec: Property Asset Management
Norwegian: Prime-yield.
Common questions
What is prime yield?
The lowest yield in the market, tied to the best buildings: new or recently refurbished standard, the best locations, long contracts with solid tenants. It is used as a reference point for the whole commercial property market.
What is the difference between prime, secondary and tertiary yield?
Prime applies to the best segment. Secondary applies to buildings with one or more weaknesses (older, peripheral, shorter contracts). Tertiary applies to weak buildings with high vacancy or imminent contract expiry and can sit several hundred basis points above prime.
What is the "yield gap"?
The distance between prime and secondary yield. A wide gap signals that investors are seeking safety, a narrow gap that capital is taking risk for a marginally higher return. In Oslo, the gap has historically varied between 100 and 250 basis points for office.
Who defines the prime segment?
It is not a formally regulated term. The broker houses Akershus Eiendom, Newsec and DNB Næringsmegling publish quarterly reports with prime yield by segment and submarket, and the industry aligns on the criteria through these reports.