Vacancy rate
The percentage of a property's units or space sitting empty at a given time; unlike the vacancy factor, it does not include losses from unpaid rent.
Key Takeaways
- Vacancy rate is the share of a property's units or rentable space sitting empty at a given time, stated as a percentage.
- Divide vacant units by total units to get the vacancy rate: three empty units in a 24 unit building is a 12.5 percent vacancy rate.
- The vacancy rate counts empty space only, while the vacancy factor also subtracts rent that occupied tenants owe but never pay.
- Vacancy is deducted from potential gross income to reach effective gross income, one step before net operating income.
What It Means
The vacancy rate is the share of a rental property sitting empty, stated as a percentage. For apartments, divide vacant units by total units. For office, retail, or industrial space, divide vacant square feet by total rentable square feet. Three empty units in a 24 unit building is a vacancy rate of 12.5 percent, and its complement, 87.5 percent, is the occupancy rate.
The number does one specific job in a valuation. Income property analysis starts with Potential Gross Income, the rent the property would collect if every unit were full and every tenant paid in full. No property collects that. Deducting the vacancy allowance, along with collection loss, produces Effective Gross Income, and operating expenses come off effective gross income to reach Net Operating Income.
Keep the vacancy rate separate from the Vacancy Factor. The rate measures empty space and nothing else. The factor is the broader allowance an appraiser or investor deducts, and it includes rent that occupied tenants owe but never pay, called collection loss or credit loss. A building can be fully leased and still lose rent, and that gap is the reason the two terms exist as separate words rather than as one.
How It Works in Washington
Washington attaches the vacancy assumption to two different obligations. On the valuation side, RCW 84.40.030 permits consideration of capitalization of income that would be derived from prudent use of the property when a Washington assessor values real estate. Prudent use is not full occupancy. An assessor or an appraiser capitalizing income on a Washington apartment building deducts a market vacancy allowance before capitalizing, which is why an owner contesting an assessment often argues about the vacancy assumption rather than about the rents.
On the money side, a Washington firm managing the building answers to WAC 308-124E-115, which requires that any property management accounting system be an accounting of cash received and disbursed and that owner summary statements include a complete accounting of cash in and out. That rule is what converts a projected vacancy rate into a documented one: the owner statement shows what was collected each month, so the gap between the pro forma and reality is visible rather than assumed. Brokers moving into income property should get fluent in these mechanics, and this guide to commercial real estate in Washington covers the surrounding vocabulary.
Example
Cedar Court is a 24 unit apartment building in Yakima. Every unit rents for $1,150 a month, so potential gross income is 24 units times $1,150 times 12 months, or $331,200 a year.
Across the year the building averaged three empty units. Three divided by 24 is a vacancy rate of 12.5 percent, and 12.5 percent of $331,200 is $41,400 of rent lost to vacancy. Separately, one tenant moved out owing $4,000 that was never collected. That $4,000 is collection loss. It does not belong in the vacancy rate, because the unit was occupied the whole time the rent was accruing.
Effective gross income is $331,200 minus $41,400 minus $4,000, or $285,800. An appraiser reporting the broader vacancy factor combines both deductions: $41,400 plus $4,000 is $45,400, and $45,400 divided by $331,200 is 13.7 percent. Same building, same twelve months, two different percentages. A student who reports 13.7 percent as the vacancy rate has answered a different question than the one asked.
Common Mistakes and Exam Traps
- Vacancy rate and vacancy factor are the classic swapped pair. Only the factor includes collection loss from tenants who occupy space and do not pay.
- Vacancy is deducted from potential gross income, not from net operating income. Subtracting it a second time further down the statement is a common calculation error.
- Occupancy rate is the complement of vacancy rate. A 12.5 percent vacancy rate means 87.5 percent occupancy, and a question may state either one.
- When a building's current vacancy is unusually high or low, an appraiser uses a market derived vacancy rate rather than the subject property's own figure.
Where you'll learn this
Frequently Asked Questions
What is the difference between the vacancy rate and the vacancy factor?
The vacancy rate measures empty units or empty space only. The vacancy factor is the larger allowance that also subtracts rent owed by occupied tenants who do not pay, called collection or credit loss. The factor is therefore the same size or larger than the rate.
Where does vacancy fit into the income approach to value?
It is the first deduction. Start with potential gross income, subtract vacancy and collection loss to get effective gross income, then subtract operating expenses to get net operating income, which is what gets capitalized into a value estimate.
Should an investor use the building's actual vacancy or the market vacancy rate?
Use the actual figure when it is typical for the submarket and stable over time. When it is distorted by a one time event, such as a renovation that emptied a wing, substitute a market derived rate so the value estimate reflects normal operations.