Vacancy Rate
Vacancy Rate Formula
A 50-unit apartment building with 4 units vacant has an 8% vacancy rate. An alternative approach uses income: if gross potential rent is $500,000 and actual collected rent is $465,000, the economic vacancy rate is 7%.
Typical Vacancy Rates by Property Type
| Property Type | Typical Vacancy Range | Notes |
|---|---|---|
| Multifamily (Class A) | 3% – 7% | Strong demand in most metros |
| Multifamily (Class B/C) | 5% – 10% | More turnover, price-sensitive tenants |
| Office | 10% – 20% | Post-pandemic shift to remote work increased vacancy |
| Industrial / Warehouse | 3% – 6% | E-commerce driving strong demand |
| Retail | 5% – 12% | Highly location-dependent |
| Single-Family Rental | 5% – 8% | Turnover between tenants creates periodic vacancy |
Physical Vacancy vs. Economic Vacancy
| Feature | Physical Vacancy | Economic Vacancy |
|---|---|---|
| Measures | Empty units as a % of total | Lost income as a % of potential rent |
| Includes concessions? | No | Yes — free rent, discounts, etc. |
| Includes non-paying tenants? | No — unit is occupied | Yes — income is lost regardless |
| More accurate? | Simpler but incomplete | Better reflection of actual income loss |
Economic vacancy is more useful for investment analysis because a unit occupied by a non-paying tenant or a unit where you offered two months free rent still represents lost income. Physical vacancy can look fine while economic vacancy tells a different story.
How Vacancy Impacts Property Value
Vacancy feeds directly into the NOI calculation. Since property values in commercial real estate are driven by NOI (Property Value = NOI ÷ Cap Rate), every percentage point of vacancy translates to a direct hit on value.
Consider a 100-unit property with average rent of $1,200/month. Each 1% increase in vacancy costs $14,400 per year in lost rent. At a 6% cap rate, that’s $240,000 in lost property value — per percentage point of vacancy.
Factors That Drive Vacancy
Local supply and demand. When new construction outpaces population growth, vacancy rises. When demand exceeds supply, vacancy compresses.
Pricing. If your rents are above market, tenants leave and new prospects choose cheaper alternatives. Overpricing is the most controllable driver of vacancy.
Property condition. Deferred maintenance, outdated finishes, and poor management increase turnover and extend time-to-lease between tenants.
Location and accessibility. Properties near employment centers, transit, and amenities consistently maintain lower vacancy rates.
Economic cycles. During recessions, vacancy rises as tenants downsize, double up, or move to cheaper options. During expansions, vacancy falls as demand strengthens.
Key Takeaways
- Vacancy rate = Vacant Units ÷ Total Units — it measures the share of unoccupied space in a property or market.
- Economic vacancy is more useful than physical vacancy because it captures concessions, free rent, and non-paying tenants.
- Every point of vacancy directly reduces NOI, which reduces property value and DSCR.
- Always underwrite deals at stabilized (market-average) vacancy, not the seller’s optimistic current number.
- Vacancy is driven by supply/demand, pricing, property quality, location, and economic cycles.
Frequently Asked Questions
What is a good vacancy rate for a rental property?
For multifamily, 3-7% is generally healthy. Below 3% might mean rents are too low (you’re leaving money on the table). Above 10% signals potential problems with pricing, location, or property condition. Compare to the local market average.
How does vacancy rate affect NOI?
Vacancy directly reduces gross income, which flows through to NOI. Higher vacancy means lower NOI, which in turn reduces property value (via the cap rate formula) and weakens debt service coverage.
What’s the difference between vacancy rate and occupancy rate?
They’re inverses. Vacancy Rate + Occupancy Rate = 100%. A 95% occupancy rate equals a 5% vacancy rate. Both metrics convey the same information — it’s just a matter of framing.
Should I factor vacancy into rental property projections?
Always. Even in a tight market, assume at least 5% vacancy for turnover between tenants, maintenance periods, and the occasional bad tenant. Projecting 100% occupancy is a common beginner mistake that inflates expected returns.
How can I reduce vacancy in my rental property?
Price competitively (within 5% of market), maintain the property well, respond quickly to tenant requests, start marketing before current tenants move out, and screen tenants carefully to reduce turnover. Each month a unit sits empty costs you a full month’s rent in lost income.