Vacancy Rate Explained

Multifamily Building

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:

  1. Determine the number of vacant units and the total number of units in a property.
  2. Divide the number of vacant units by the total number of units.
  3. 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.