The vacancy rate of a property is typically calculated by summing up all the vacant units and then taking this figure and dividing it by the sum of all the units on the property, then multiplying the result by 100 since the rate is a percentage.
The occupancy rate is the polar opposite of the vacancy rate as it measures the total number of occupied units in a building and divides the number by the total number of units in the property to arrive at the percentage of occupied units.
The summation of the vacancy rate of a property and its occupancy rate should be exactly 100%, not more, or less.
Applications of the Vacancy Rate
In real estate, the vacancy rate usually takes into consideration all the available units regardless of the reasons why they are vacant. Some units may be ready for occupation, but are yet to find tenants, some may need renovations or repairs and may be unavailable for renting, while the landlord might have reserved other units after they were vacated.
The use of the vacancy rate metric is not strictly limited to the real estate sector as the ratio is used in other industries and professions such as by human resource practitioners. For example, the vacancy rate of a company usually refers to the number of vacant positions that are yet to be filled as compared to the total number of positions available within the company.
The Natural Vacancy Rate
The natural vacancy rate is the average, normal, or traditional ratio of rental units that are available or unoccupied within a given neighborhood or community. This is an important ratio because it acts as a guideline for landlords in the area as to what they should expect in terms of the occupancy rates in their properties.
In any community or neighborhood, it is quite normal to find some properties with 100% occupancy rates, but it is highly unlikely to find an entire neighborhood with no vacant units. There are always some vacant units within most if not all communities, which is what is used to calculate the natural vacancy rate.
How Vacancy Rates Are Analyzed In Real Estate
A landlord can easily use the vacancy rate for his property to judge how competitive the rental property is in relation to other properties in the neighborhood. There are multiple ways that a landlord can appropriately assess the competitive edge of his property. For example, he could monitor how vacancy and occupancy rates for his property are changing every quarter including how long tenants are staying in the occupied units.
A property owner can also assess the impact of rental prices on the occupancy and vacancy rates at his properties. For example, a landlord may have a low occupancy rate in his building simply because he is charging higher rents than those of nearby apartments. He may also have a higher occupancy rate if he is charging lower rents than the market standard.
Sometimes, advertising a property with vacant rental units may result in a higher occupancy rate that the market average.
The overall health of a real estate market is usually defined by the combined vacancy and occupancy rates in the selected region. Occupancy and vacancy rates as well as construction activity are the metrics most used by real estate analysts to measure the current performance of a real estate market.
Official Vacancy Rates Tracking in the United States
The data on residential vacancy rates is tracked by the U.S. Census Bureau, which releases detailed reports every quarter highlighting the homeownership rate, the vacancy rate for homeowners, and the vacancy rate for rental units. In 2018, the nationwide vacancy rates for rentals in the United States has hovered between 6.5% and 7.0%, while homeowner housing has registered a much lower vacancy rate of between 1.6% and 1.8%. These rates have been largely stable in the last few years as compared to the highs that were hit during the housing market crisis of 2008 to 2009.
The Census Bureau’s quarterly report also tracks changes in rental prices among other statistics relating to real estate. The residential data can be used in the same way as the data on commercial real estate to draw conclusions regarding the current state of the real estate industry in different markets.
