Vacancy Rate
The vacancy rate is the percentage of all available rental units or leasable square footage in a property or market that is unoccupied at a given point in time. It is a key indicator of market health and directly impacts a property's effective gross income.
Vacancy rate is one of the most closely watched metrics in commercial real estate because it directly affects property income and, by extension, property values. A rising vacancy rate signals weakening demand and may lead to rent concessions, while a declining vacancy rate indicates strengthening demand and potential rent growth. Markets with vacancy rates below their long-term average are generally considered landlord-favorable.
At the property level, vacancy is a critical underwriting assumption. Most lenders and investors apply a vacancy factor of 5-10% even for fully occupied properties to account for the natural turnover between tenants. Underwriting a property at 0% vacancy is considered aggressive and unrealistic. For properties with significant near-term lease expirations, the vacancy assumption should reflect the realistic probability and timeline of re-leasing those spaces.
It is important to distinguish between physical vacancy (physically unoccupied space) and economic vacancy (space that is occupied but not generating revenue, such as free-rent periods or non-paying tenants). Economic vacancy provides a more accurate picture of income loss. Additionally, market-level vacancy rates published by research firms like CoStar, CBRE, or JLL are useful for context but may mask significant variation between submarkets, building classes, and property types within the same metro area.
Formula
Worked Example
A 100,000 SF office building has 12,000 SF currently vacant. Physical vacancy rate = 12,000 / 100,000 = 12%. If an additional 5,000 SF is occupied by a tenant in a 6-month free rent period, economic vacancy = 17,000 / 100,000 = 17%.
Related Terms
Effective Gross Income
Effective gross income (EGI) is the total income a property generates after subtracting vacancy and credit losses from potential gross income. It represents the realistic collectible income before operating expenses.
Absorption Rate
The absorption rate measures the pace at which available commercial space is leased or sold in a specific market over a given period. Positive absorption indicates demand is outpacing supply, while negative absorption means the market is adding more vacant space than it fills.
Stabilized Occupancy
Stabilized occupancy is the expected long-term occupancy level a property will maintain once it has been fully leased and reached a steady state, accounting for normal tenant turnover. It is a key assumption in property valuation and pro forma modeling.
Market Rent
Market rent is the rental rate a property or space would command on the open market under current conditions, based on comparable leases for similar space in the same submarket. It serves as the benchmark against which in-place rents are evaluated.
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