8 min read May 21, 2024

What is Vacancy Rate and How Do You Calculate It?

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Edited By

Prayas Biswas

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Editor
Edited By

Prayas Biswas

Editor, Houzeo
About

Prayas B. is a detail-oriented content editor specializing in American real estate. In his free time, he enjoys hitting the pitch for a game of football or watching motorsports.

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0.8% of homes and 6.6% of rental units stayed vacant nationwide in the first quarter of 2024. The vacancy rate for offices averaged 20.2%. Growing vacancy rates mandate that owners and property managers adopt proactive strategies to keep earning revenue.

These strategies can include incentives like rent discounts or improving the property condition. This makes knowledge of vacancy rates essential for property managers and investors.

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💲Vital Insights of Vacancy Rates

  • A high vacancy rate (typically above 7-8%) indicates an oversupply of housing units. It can lead to lower rental rates and longer vacancy periods.
  • A low vacancy rate (typically below 5%) suggests a tight housing market with high demand. This could potentially result in higher rental rates, quicker turnover of vacant units, and upward pressure on property values.
  • Calculating the vacancy rate involves dividing the number of vacant units by the total number of units and multiplying by 100.

What is Vacancy Rate?

The vacancy rate is the percentage of all available and unoccupied rental units in a facility at any moment. It is used to determine the available units in relation to the overall supply of rental properties in the housing market.

It is the reverse of the occupied unit percentage or occupancy rate. Low vacancy rates imply strong demand, whereas high rates reflect poor rental performance. 

How to Calculate Vacancy Rate?

Divide the number of empty units by the total number of units to calculate the vacancy rate. Then, multiply the result by 100. 

Vacancy Rate Formula = Vacant Units in the Building * 100 / Total Number of Units in the Building

How to Calculate Physical Vacancy Rate?

Physical vacancy rate can be calculated by dividing the number of unoccupied units by the total number of units available in a given property. The formula for calculating it is as follows:

If a 100-unit apartment complex has 10 vacant units, the calculation would be:

Physical Vacancy Rate = (Number of Unoccupied Units / Total Number of Units) x 100

= (10 / 100) x 100 = 10%

How to Interpret Physical Vacancy Rate

Here is the analysis for high and low vacancy rates:

High Vacancy Rate

A high percentage reveals an excess of available homes in a particular location. An average rate above 7% to 8% indicates a difficult market. The effects of a high vacancy rate are as follows:

  • Increased competition among landlords or property owners to attract tenants lead to lower rental rates or incentives.
  • Longer periods of vacancy result in reduced cash flow and higher operating costs for property owners.
  • Potential reduction in property values, as high vacancy rates can make the area less desirable for investors.
  • Excess inventory may prompt developers to slow down or halt new construction projects until demand catches up.

Low Vacancy Rate

A low percentage (usually less than 5%) suggests a strong housing market. With a high demand for available apartments, a low vacancy rate may result in the following:

  • Property values can experience hikes as a result of high demand and low supply.
  • Incentives for builders to start new projects in order to fulfill the strong demand for housing.
  • Strong negotiating position for landlords, which could result in increased rent or more stringent criteria for tenant screening.
  • Maximizes rental income for property owners since it helps speed up the turnover of unoccupied units.

What is Market Vacancy Rate?

The market vacancy rate is a broader measure that provides insights into the overall health of the real estate market in a region. It calculates this rate based on the actual physical vacancies. It also counts units that are available for lease or sale.

Market Vacancy Rate Formula

The formula for calculating it is as follows:

Market Vacancy Rate = (Number of Vacant Units Available for Rent or Sale / Total Housing Units) x 100

How to Interpret Market Vacancy Rate?

Understanding the market vacancy rate can help property managers and investors assess the demand for real estate in a particular region.

High Rate of Vacancy

  • Importance: A high rental vacancy percentage indicates an excess of rental units on the market, which can be risky for investors. This is because properties may take longer to rent out than anticipated, and reduce rental income.
  • Consequences: Properties with high rental vacancy rates are often viewed as less desirable. This is because they may be in unsuitable locations or need extensive repairs.

Low Rate of Vacancies 

  • Importance: A low vacancy percentage indicates a strong housing market. This also shows great demand for homes in a particular region.
  • Consequences: Low vacancy rates means properties in a region are more appealing to buyers. They have the potential to attract higher offers, and drive up rental income.

How Does Vacancy Rate Affect Other Real Estate Metrics?

Vacancy rates have a crucial impact on various real estate metrics. It affects investments and other decisions for property owners and investors.

  • Vacancy rates and rental rates have an inverse relationship. With high vacancy rates, landlords may need to lower rental rates to attract tenants. However, low vacancy rates allow landlords to increase the rent due to high demand.
  • High vacancy rates can lead to higher cap rates, and make the investment risky. Conversely, low vacancy rates often result in lower cap rates. This signals a more stable environment to invest in properties.
  • Vacancy rates directly impact property values. Properties with high vacancy rates are less valuable due to lower rental income opportunities.
  • Properties with low vacancy rates tend to have higher values due to their ability to generate a stable cash flow.
  • The absorption rate measures the rate at which available housing units are rented or sold in a given market. Low vacancy rates often correspond to high absorption rates, indicating strong demand and a healthy market.

What Factors Affect Vacancy Rate?

  • Economic Conditions: Job losses and lower spending during recessions can make it difficult for people to buy housing. It also makes it difficult to relocate in search of work, which can increase vacancy rates.
  • Population Growth: Due to higher demand for housing, areas with population growth have lower vacancy rates.
  • Housing Costs: If housing expenses rise too much in comparison to income levels, people may find it difficult to find a home in a given location.
  • New Constructions and Housing Supply: Until demand catches up, a rise in newly constructed homes may temporarily raise vacancy rates.

How To Evaluate a Potential Investment?

Vacancy rates can be used in the following ways to assess investments:

  • Analyze Historical Vacancy Rates: It will help pinpoint probable reasons or elements that could have impacted current trends.
  • Weigh Market Averages: A vacancy rate much higher than the market average may be a symptom of excess supply or other problems that could affect profits.
  • Consider Future Supply and Demand: Examine elements that could affect the area’s real estate supply and demand in the future. This can include new constructions or incoming policy changes.
  • Calculate Potential Returns: Lower vacancy rates can result in more consistent and higher profits. However, greater vacancy rates may lead to higher cap rates.
  • Develop a Risk Reduction Strategy: Create a plan to reduce risk if the vacancy rate is higher than you would like. This can include targeted marketing and advertising, or tenant retention programs.

How to Analyze Rental Performance?

The vacancy rate is an important metric to assess rental success. A high vacancy rate is a sign of failing rental properties. This is because unoccupied apartments result in lower rental income and more expenses. 

To properly assess rental performance, owners should monitor their vacancy rates over time. Properties with consistently higher vacancy rates might benefit from targeted decisions.

Low vacancy rates indicate strong demand for rentals. This can lead property owners or managers to raise rent or introduce more strict tenant screening procedures.

Bottom Line

Vacancy rates offer crucial insights into the balance of supply and demand within a specific housing market. As an investor or property owner, understanding vacancy rates well is essential to make well-informed decisions.

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Frequently Asked Questions

What is the vacancy rate?

It is the percentage of rental properties that are vacant in a particular region. It is an important statistic in real estate that sheds light on the performance of properties.

What's the formula for calculating vacancies?

To calculate vacancy rate, divide the total number of units by the number of empty units, then multiply the result by 100. Vacancy Rate Formula = Vacant Units in the Building * 100 / Total Number of Units in the Building

What is the optimal vacancy rate?

A market average vacancy rate of 2% to 7% is considered healthy in a balanced rental market.

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