Vacancy Rate Explained
What is Vacancy Rate?
The vacancy rate of a commercial property describes the percentage of all available units that are vacant or unoccupied at a particular time or over a specified period of time. Vacancy rate is the literal opposite of the occupancy rate, which refers to the percentage of occupied units in a commercial property. The vacancy rate is a widely recognized performance indicator in commercial property markets — high vacancy rates translate to poor rental performance, while low vacancy rates denote stronger rental activity and retention.
A few key factors can affect the vacancy rate of a property. For example, if a property's asking rent price is out of the reach of its target renter population, this could lead to higher vacancy. In some cases, repairs or renovations take longer periods of time than expected, preventing new tenants from moving in. Property-scale upgrades, while typically used to increase a property’s value, can cause enough of a burden to tenants to cause a few to permanently vacate their units — though increased rents once capital improvements are complete can usually offset the losses. One of the more well-known (and often joked about) factors in the vacancy rate of a property is its location, location, location. Many properties in less-desirable areas suffer from periods of high vacancy rates.
How to Calculate a Vacancy Rate
Calculating the vacancy rate for a commercial property can be done in a few easy steps:
- Determine the number of vacant units and the total number of units in a property.
- Divide the number of vacant units by the total number of units.
- Multiply the result by 100 to find your vacancy percentage.
For example, if an apartment building with 50 units has 13 vacant units, you would divide 13 by 50, for a result of 0.26. That number is then multiplied by 100 resulting in a 26% vacancy rate.
Vacancy Rate Formula:
Vacancy Rate = (Number of Vacant Units ÷ Total Number of Units ) x 100
Why Vacancy Rates Are Important
For any commercial real estate investor, it’s helpful to know the vacancy rate of a target property in comparison to the market’s vacancy to determine the property’s performance. A higher vacancy rate can be indicative of a poorly managed or poorly maintained property. However, all rental properties by nature are guaranteed to have some vacancy, which will impact the overall performance of a property and an investor’s return on investment, or ROI. Understanding a market’s vacancy — along with the vacancy rate of a specific property — enables an investor to make more informed decisions when looking for ways to boost rental income or improve sales or marketing strategies.
Related Questions
What is the average vacancy rate for commercial real estate?
The average vacancy rate for commercial real estate varies depending on the type of property and the location. According to Apartment Loans, the average vacancy rate for office space is around 10-15%, while the average vacancy rate for retail space is around 5-10%. The average vacancy rate for industrial space is around 5-7%.
What factors influence vacancy rates in commercial real estate?
Vacancy rate is a widely recognized performance indicator in commercial property markets — high vacancy rates translate to poor rental performance, while low vacancy rates denote stronger rental activity and retention.
A few key factors can affect the vacancy rate of a property. For example, if a property's asking rent price is out of the reach of its target renter population, this could lead to higher vacancy. In some cases, repairs or renovations take longer periods of time than expected, preventing new tenants from moving in. Property-scale upgrades, while typically used to increase a property’s value, can cause enough of a burden to tenants to cause a few to permanently vacate their units — though increased rents once capital improvements are complete can usually offset the losses. One of the more well-known (and often joked about) factors in the vacancy rate of a property is its location, location, location. Many properties in less-desirable areas suffer from periods of high vacancy rates.
Source: Vacancy Rate Explained
How can I calculate the vacancy rate for a commercial property?
Calculating the vacancy rate for a commercial property can be done in a few easy steps:
- Determine the number of vacant units and the total number of units in a property.
- Divide the number of vacant units by the total number of units.
- Multiply the result by 100 to find your vacancy percentage.
For example, if an apartment building with 50 units has 13 vacant units, you would divide 13 by 50, for a result of 0.26. That number is then multiplied by 100 resulting in a 26% vacancy rate.
Source: Apartment.loans
What strategies can I use to reduce vacancy rates in commercial real estate?
There are several strategies you can use to reduce vacancy rates in commercial real estate. One is to research your local office market regularly and assess ongoing trends in the office sector. This will help you better prepare to keep your office property full when times are tough. You can also keep a diverse tenant mix, as this will help mitigate risk if one company downsizes. Additionally, you can allow for flexible lease terms, as this will help keep tenants happy and reduce vacancy. However, be careful not to be too flexible, as this could open you up to greater risks.
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How does the vacancy rate affect the value of a commercial property?
The vacancy rate of a commercial property can have a significant impact on its value. A high vacancy rate can indicate a poorly managed or maintained property, which can lead to lower rental income and a lower return on investment. On the other hand, a low vacancy rate can indicate strong rental activity and retention, which can lead to higher rental income and a higher return on investment.
Location is also a key factor in determining a property's vacancy rate. Properties in less desirable areas may suffer from higher vacancy rates, while properties in desirable areas may have lower vacancy rates.
Property-scale upgrades can also affect the vacancy rate of a property. While upgrades can increase a property's value, they can also cause enough of a burden to tenants to cause them to vacate their units.
Finally, the asking rent price of a property can also affect its vacancy rate. If the asking rent price is out of the reach of its target renter population, this could lead to higher vacancy.