What does vacancy rate mean?
Updated June 25, 2021
The vacancy rate refers to the percentage of available units in a rental building, or even on the market as a whole. Its opposite is the occupancy rate, which is the percentage of units that are occupied. Together, the vacancy rate and the occupancy rate should add up to 100%. Low vacancy rates indicate that the property is renting well and that people want to live in a particular building or neighborhood while high vacancy rates can indicate problems with the building and its management or the geographic area. Investors use vacancy rates to determine whether a potential investment is a good moneymaker by comparing it with other comparable properties.
Vacancy rates are used by property owners as an indicator of how well their buildings are performing compared with the area’s vacancy rate. They are also used as indicators for the broader real estate market and the overall economy. Residential units may be vacant for a number of reasons, including the recent move-out of a tenant, that the unit is being repaired or updated, that it’s overpriced compared with the rest of the market, or the building is in an undesirable neighborhood.
The vacancy rate refers to the percentage of empty apartments in a building or across a city. Credit: Victor He/Unsplash
To calculate a vacancy rate, multiply the number of vacant units by 100 and divide that result by the total number of units. If an apartment building has 200 units and 20 of them are unoccupied, that means the property has a 10% vacancy rate. In the U.S., vacancy rates vary widely by region and municipality, with rural areas having higher rates. In recent years, the average national vacancy rate has hovered around 7%. In general, 2% to 4% is considered a good vacancy rate for metropolitan areas. New York, for example, saw its vacancy level increase during the worst of the Covid-19 pandemic, a sign that people had left the city, the market was suffering and, as a a result, landlords were willing to offer more concessions to entice their renters to stay (or new renters to move in).
Using Vacancy Rates as a Planning Tool
A property owner can use vacancy rates, and how they change over time, as an analytic tool for short- and long-term planning. Perhaps the market has changed and the apartment rents have become too high compared with neighboring rental properties, or the owner needs to do more marketing and advertising to promote the building and its new amenities. There are a number of ways to keep vacancy rates low, including screening tenants carefully to reduce turnover, maximizing curb appeal with attractive landscaping, adding amenities like gyms and swimming pools and proactively reaching out to tenants before their lease is up for renewal to offer incentives to sign a new lease. It also helps if management plans unit switchovers and updates ahead of time so that any needed repairs and updates begin the day the old tenants leave.
A number of outside factors can cause vacancy rates to rise, including a low-income workforce, a limited job market that is heavily dependent on one key employer and an overly saturated real estate market with lots of similar rental housing. Low mortgage interest rates can cause more people to buy rather than rent, so there may be an uptick in available rentals. On the flip side, nearby amenities like grocery and retail stores, a public transportation hub or a university can attract renters to a property and keep vacancy rates low.
There are a number of sources with information on vacancy rates, including property managers and real estate agents and brokers who specialize in working with rental properties and have access to the local Multiple Listing Service. Local real estate associations and municipal authorities may publish statistics that include rental vacancy and occupancy rates. The U.S. Census Bureau compiles residential data in quarterly and annual reports that look at rental prices and vacancy rates, homeowner vacancy rates and homeownership rates.