Vacancy Rate

The vacancy rate is an important concept in market analysis for all residential and nonresidential (e.g., retail, office, warehouse) real property types. This discussion focuses on residential markets, especially the apartment market, but it is also applicable to the nonresidential markets.

Housing market participants (tenants, landlords, and property managers) need to understand the nature and significance of the vacancy level and the vacancy rate for dwelling units in both the single family and the multifamily housing markets. The vacancy rate is the amount of vacant space divided by the total amount of space available at a given time. In a multifamily structure the vacancy rate is the number of vacant units divided by the total number of dwelling units in the apartment building or complex. So 6 vacant units in an apartment facility containing 100 units is a 6% vacancy rate for the structure. The vacancy rate in a residential rental market is the number of vacant units in the market divided by the total number of units in the market. In a single family market area, 100 vacant units in a market area containing 1,000 units is a 10% vacancy rate.

The market vacancy rate changes as demand and supply determinants in the market change. If demand increases while supply remains constant or if demand increases by more than the supply increases, then the vacancy level and the vacancy rate will decline. If, on the other hand, supply increases while demand remains constant or if supply increases by more than demand increases, then the vacancy level and the vacancy rate will increase. If demand declines relative to supply, then the vacancy level and thus the vacancy rate will increase.

In the economic context for a market, the level of vacant units and thereby the vacancy rate is the measure of excess supply in the market at a rent level above the equilibrium rent level. The vacancy level measures the number of dwelling units that do not clear the market.

The vacancy rate for a multifamily dwelling structure can and most typically changes as the market vacancy rate changes. But there is no fixed relationship between the vacancy in a specific structure and the vacancy in the market. However, the vacancy rate for a specific multifamily building can be greater than the market rent if (a) potential renters view it as inferior to the other available comparable units at the same level or if (b) the marketing and the leasing activities of the landlord or property managers are inferior to the actions of the other owners and property managers supplying dwelling units to the market.

Specific leasing arrangements and turnkey operations of the owner or property manager also affect the vacancy rate for a single multifamily dwelling structure. An apartment building can be fully leased during a time period and still exhibit vacancy in its financial accounts. For example, a tenant moves out of an apartment unit on the last day of June, and a tenant is found for July. However, it will take 5 days to prepare the apartment for the new tenant; the walls need to be repainted, the kitchen and bathroom need to be cleaned, and the carpeting needs [Page 766]to be steam cleaned. The new tenant moves into the apartment on July 6 and starts paying rent that day. Even though the apartment building appears to be fully occupied for the entire year, this single apartment was not generating rent for 100% of the year. It lost one sixth of a month's rent. The vacancy rate from a financial perspective for this unit is 1.67%. This figure is calculated by using a 360-day year representing 12 months of 30 days each. The unit receives rent for 354 days, so the vacancy rate is 6 360 or (1 − 354/360).

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