Vacancy Rate

Vacancy Rate Definition

The vacancy rate means the number of units available on a rental basis that are vacant or unoccupied in an apartment, building, complex, hotel, or colony, at a given period. It is expressed in percentage terms. In other words, it is exactly the opposite of the occupancy rate.

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A low vacancy rate means that the units in that particular building are in demand and that people want to stay or live in that property. Whereas a high vacancy is a concern, people may not want to stay in that vicinity. Also, from the investment point of view, one may not achieve the desired returns/profits.

Vacancy Rate Explained

Vacancy rate plays an important role in the real estate sector as the property owners get an idea regarding the performance of their property or the industry benchmark. It provides information about the vacant units in a building or complex and thus acts as an indicator of the level of profitability.

• In the real estate sector, the vacancy rate means units in a particular apartment/hotel/complex are vacant at a given specific time and available for renting purposes.
• Generally, this is used to calculate the rate per property and compare it with other similar properties, giving an idea and understanding of how the property is performing in the market.

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For eg:
Source: Vacancy Rate (wallstreetmojo.com)

In simple terms, the vacancy rate refers to vacant units compared to the total units available in the building. Now, this vacancy can be due to various reasons such as the property being under repair, some renovation is required, the tenant having just vacated the property, any sudden change in the economic scenario has caused the property to be cleared, the property is new in the market and recently been listed for rental.

Here, when we talk about property, one must understand that the property may refer to any of these: –

• Residential apartment
• Residential building
• Family houses
• Multi-Family houses
• Commercial property
• Farmhouse or vacation house
• Any condo

Factors

When it comes to assessing any rate relating to a real estate property, there are multiple determinants that need proper consideration. The same applies to the vacancy rate, which is influenced by many factors.

• The very first factor that influences the vacancy rate is the neighborhood of the property. Undoubtedly, for a person to like a property, the locality needs to be appropriate with a suitable people living around.
• The next is the age of the property. When the property gets old, it is likely to lose its charm because of its deteriorating condition. Hence, the property’s age is important.
• The location needs to be good with proper conveyance, accessibility and other facilities.
• Of course, the market rent being asked for to rent the property is an important determinant as people only choose the one within their budget.
• The income level of the potential renters is also an important factor.

Besides these matching requirements age bracket of the population living in the area, etc. might also influence the vacancy rate of a property.

Formula

The formula will be as follows: –

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

How to Calculate?

The vacancy rate calculation is done in a series, following which helps users obtain accurate results. Let us have a look at the steps:

• Step #1 – The first thing is tofind out the number of vacant units in the building.
• Step #2 – Multiply the number of units by 100.
• Step #3 – Finally, divide the resultant by the total number of units in the building.

Examples

Let us consider the following instances to understand what is vacancy rate and also see how it works:

Example 1

Mr. Joseph is looking for a property and willing to rent it for a year. Finally, he found a cozy apartment on West Street, Colorado. While researching the area and the property, he noted that the apartment he wants to rent is part of 120 units in the building. On enquiring about other available units, he was informed that there were 8 units available for a rental basis and that people had already occupied the rest.

Based on the information above, we will calculate the vacancy rate of the building where Mr. Joseph is looking to rent an apartment.

Solution:

Information required:

1. Total number of vacant units in the building = 8
2. Total number of units in the building = 120

Now, following the steps explained above, we apply this formula:

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

• = 8 * 100 / 120
• = 6.67%

Example 2

According to report published in October 2023, Texas has been witnessing a huge rise in the vacancy rate as most of the offices constructed are not in use in the state. Though Texas cities are one of the most significant regions commercially, the vacancy rates are equivalently down.

The Moody’s Analytics date reflected the office vacancy rate of Texas’ Austin is 24.2%, which is double the rates of vacancy recorded for the New York City. The reason cited for this in the report was not the dominance of the work from home or remote work culture alone, but the overbuilding of commercial premises in the area.

Importance and Uses

Calculating the vacancy rate is vital for the property owners to realize the profits that their investments can bring to them when utilized. The pointwise mention of the significance of these rates is as follows:

• A low vacancy rate means the property is good, and many buyers or people want to rent in that building or property.
• It acts as an indicator of expected profitability by renting a property in a particular area.
• It shows whether or not people want to rent a property and will help you decide if you are planning to invest in such an area.
• You must keep your eyes open and inspect why the rates are so high and any other inefficiency in renting the property.

Vacancy Rate vs Occupancy Rate

The two terms that one often comes across when dealing with an owned property are vacancy rate and occupancy rate. Both of them imply the opposite and hence it is important to understand the basic differences between the two.

Listed below are some of the differences between them in a tabular form:

Vacancy Rate	Occupancy Rate
The number of units vacant or unoccupied in a building.	The number of units occupied in a building.
Formula = Vacant Units * 100 / Total Units	Formula = Occupied Units * 100 OR =100% – Vacancy %
Used for making investment decisions.	Provides Information on income and profitability of the portfolio.

Frequently Asked Questions (FAQs)

Recommended Articles

This article is a guide to Vacancy Rate and its definition. We discuss the vacancy rate formula, examples, and their importance and uses. You can learn more about finance from the following articles: –

• Dogs of the Dow
• Short Sale in Real Estate
• Distressed Sale
• Lien Sale
• Lease Rate