noun · /ˈveɪkənsi reɪt/
Vacancy Rate
Also known as: Vacancy, Vacancy Ratio, Occupancy Loss
Definition
Vacancy rate is the percentage of all rental units or leasable space in a property that are unoccupied at a given time. It's the inverse of occupancy rate (if vacancy is 5%, occupancy is 95%). Vacancy directly impacts income—higher vacancy means less cash flow. Underwriters use stabilized vacancy assumptions to project realistic NOI.
Formula
Vacancy Rate = (Vacant Units ÷ Total Units) × 100
Or by square footage: Vacancy = (Vacant SF ÷ Total Leasable SF) × 100
Physical vs. Economic Vacancy
These two metrics measure different things—and the distinction matters for underwriting:
Physical Vacancy
Measures unoccupied space only. If a tenant is in the unit, it's considered occupied—even if they're not paying.
Example:
100-unit building, 5 vacant units
Physical Vacancy = 5%
Economic Vacancy
Measures lost income from all sources: empty units, non-paying tenants, concessions, and below-market rents.
Example:
5 vacant + 3 non-paying + 2 months free rent
Economic Vacancy ≈ 10%
Why This Matters
A property can show 95% physical occupancy but 85% economic occupancy if several tenants aren't paying or received rent concessions. Always underwrite to economic vacancy—that's what hits your bank account.
Vacancy Calculation Example
Calculate economic vacancy for a 50,000 SF office building:
Property Status
Physical Vacancy
5,000 SF ÷ 50,000 SF × 100
= 10%
Economic Vacancy
Physical: $150,000 (5,000 × $30)
Bad debt: $60,000 (2,000 × $30)
Concession: $15,000
Total loss: $225,000
$225,000 ÷ $1,500,000 × 100
= 15%
Typical Vacancy Rates by Property Type
Stabilized vacancy assumptions vary by property type, location, and market conditions:
| Property Type | Typical Range | Notes |
|---|---|---|
| Industrial/Warehouse | 3–5% | Strong demand, long lease terms |
| Multifamily (Class A) | 5–7% | Urban markets may be lower |
| Multifamily (Class B/C) | 5–10% | Higher turnover, more bad debt |
| Retail (Anchored) | 5–10% | Depends heavily on anchor stability |
| Office (Suburban) | 10–15% | Remote work impact, longer lease-up |
| Office (CBD) | 15–25% | Post-pandemic challenges in many markets |
Pro Tip: Check Local Market Data
National averages are just starting points. Pull CoStar, CBRE, or local broker reports for submarket-specific vacancy rates. Your lender will compare your assumptions against these benchmarks.
How Vacancy Impacts Property Value
Even small changes in vacancy dramatically affect value through the income approach:
| Vacancy | EGI | NOI | Value @6% Cap | Difference |
|---|---|---|---|---|
| 5% | $950,000 | $570,000 | $9,500,000 | — |
| 10% | $900,000 | $540,000 | $9,000,000 | −$500,000 |
| 15% | $850,000 | $510,000 | $8,500,000 | −$1,000,000 |
Based on $1M gross potential rent, 40% expense ratio, 6% cap rate. Each 5% increase in vacancy reduces value by $500K in this example.
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