What is Vacancy Rate in Real Estate and How to Calculate It?

May 24, 2019

Real estate vacancy rate is the defined as the percentage of total units in a single rental property that remain uninhabited during a specific period of time. The vacancy rate for commercial property is determined by multiplying the number of vacant units by 100 and finally dividing the same by total number of units in the property.

Commercial real estate values (and renting income), like all commodities, are a function of supply and demand. When the supply is high (with high vacancy rates), there is a strong degree of price pressure to shove prices down. When the supply of commercial real estate is tight, and vacancy rates are low, the price rises to meet the demand. This price fluctuation is a valuable indicator on how rapidly resources are allocated to different sectors of the commercial real estate market, and are seen by many businesses and regional governments as indicators of the financial health of a city.

Right now, in spite of the financial crunch, commercial vacancy rates are at all-time lows, in a lot of cities. As a commercial real estate investor, if you happen to be living on the hottest real estate market, which is the Noida city, offering commercial space for sale in Noida, the growth areas lie in getting more units available; there are people who want to invest their resources and a need to be in a “trophy” area, one where they have access to the prime properties available at prime locations of their preferred city.

Importance of vacancy rate in commercial real estate

The vacancy rate in real estate is used as a pointer to perceive how the property is performing overall when compared to the average vacancy rate of the commercial properties in that very area. To simplify the term and its importance in real estate, we would say that high vacancy rate is considered bad and might indicate the economic downturn in a city or a specific area in a city. High vacancy rate for a particular property also means that the property is undesirable or is at an undesirable location.

Similarly, low vacancy rate is considered positive and an indication that people want to invest in that property or in that particular area or city. The vacancy rate varies by property types and location, however to know what percentage of vacancy rate is good and bad – vacancy rate under 4% is low, which means it is good and vacancy rate above 7% is high, which is bad.

How to calculate vacancy rate using a formula?

Investors can use the following formula to determine an accurate vacancy rate

Vacancy Rate = Number of Vacant Units x 100 / Total Number of Units

Let’s explain how to use this formula with an example-

Here we have a commercial building with 80 office space units and we assume that 12 office space units are unoccupied. And if we know this fact that the average vacancy rate of that area is 5%, we can find the vacancy rate of the commercial building as-

a) Multiply the vacant office space units by 100, which is 12 x 100 =1200

b) Divide 1200 by the total number of office space units in the building, which makes 1200/80 = 15

Hence the vacancy rate of this commercial property would be 15%, which is three times higher than the average vacancy rate of the area, which means the property is not a good investment option. There can be ‘N’ number of reasons why the property has higher vacancy rate, may be the property is overpriced, the construction is outdated, poor construction quality, the property is unattractive, at poor location and/or lacks amenities.

With this example, it becomes easy to understand that how important it is to calculate the vacancy rate, as it helps in analyzing a property. It gives you perfect information on how the property is performing in current market situation and you can even evaluate the past vacancy rates to determine how the property has performed over the years.

Bottom Line

It is vital to calculate and know about the vacancy rate of a property. Calculate it and compare it with the properties available in different areas. A property should have a vacancy rate lower than 4% to be effectively productive for its investor.

The vacancy rate is the opposite of the occupancy rate.

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