Vacancy RateVacancy Rate is a measure of lost rental income because a rental unit is empty. It is expressed as a percentage of the total days empty in a year divided by the total number of days in the year. The US national average Vacancy Rate is 5%.
What is Rent Vacancy Rate?
Vacancy Rate is an operating expense of investment properties. It is measured as a simple percentage of the total days of lost rent during the year. In Big City Markets like Los Angeles, the vacancy rate for residential properties is on average between 4% and 5%. I have seen Vacancy Rates climb as high as 10% or more during recessions and below 3% during real estate booms.
Buyers, investors, and lenders use vacancy rates to factor vacancy loss into their income property projections. Since Vacancy Rates are an indication of the balance between supply and demand, they can be used to assess the overall health of a real estate market. When Vacancies are high – 6% or more, prices are sure to go down. When Vacancies are low- under 3%, prices are sure to rise, and developers will be looking to build more inventory to take advantage of a supply shortage.
Vacancy rates can vary because of a lot of different reasons, we just talked about the most important one which is the economy. Vacancy rates vary by area too. In the US, the South and Midwest have 2% to 3% higher vacancy rates then the East and West Coasts.
One of the biggest factors for vacancy rate is the property type. Residential properties such as homes, condos, duplexes, triplexes and Apartments have lower vacancy rates than commercial real estate. Office buildings have higher vacancy rates than residential, 15% vacancy rate is horrible for residential but is average for office, and 10% vacancy would be considered very good in the office market. Hotels have some of the highest vacancy rates of investment real estate averaging 40% to 50% Vacancy as an industry. Retail is slightly better than Office.
The opposite of the Vacancy Rate is the Occupancy Rate. 5% vacancy rate means 95% occupancy rate. Occupancy Rates are more frequently used for hotels whereas vacancy rates are more common for everything else.
What is a good Rental Vacancy Rate?
Vacancy is bad for property owners so the closer to zero the better. 5% is the average, so if you have less than that I’d say you are doing well. I wouldn’t get too focused on the vacancy rate- finding a good tenant matters much more than a statistic. Also if you have abnormally high vacancy rate for your area and comparable property type- that might indicate that you are doing something wrong. The easiest way to get down vacancy rates is to give tenants good service so you keep them longer, and when you do have a vacancy to advertise it well to fill it more quickly.
How to Calculate Vacancy Rate
Example #1: Calculate Annual Vacancy Rate
Let’s suppose you have a single-family home and it takes you 2 months to rent it. It is rented for the rest of the year. So take 60 days / 365 days = 16.4% Vacancy Rate.
1 month of vacancy is about an 8% vacancy rate.
Example #2: Apartment Vacancy Rates
Let’s suppose you are a landlord with 100 units. 10 of your units turn, (1) unit takes 3 months to rerent and the other 9 units only take 1 month.
90 days + 9×30 days = 360 days of lost rent
100 units x 365 days = 36,500
360/36,500 = ~1% vacancy rate. (this made up scenario would be very good in real life)
My Property is 100% Occupied – I don’t have any Vacancy
While it is true that most owners don’t experience a 5% vacancy per year, they will either have 0% vacancy or 8%-16%+ plus vacancy the year they have a tenant turn, the average vacancy rate is an estimate of vacancy loss over time. If you are in the business of real estate, there will be loss of rental income to vacancy at some point. It takes time for a tenant to move out, the property to be made rent ready, marketed, and a new tenant to move in. Very rarely do all of those things happen at once. I’d say the average turn time on a rental unit is 30 days. I have seen some landlords struggle to find a tenant for months. Factoring in some vacancy loss is just being realistic.
Where can I find Los Angeles Vacancy Rate Information?
There are several sources of Vacancy Rate Data.
#1) The Los Angeles Business Journal creates a special report for real estate each quarter that has Vacancy Rates.
#2) The US Census Bureau also collects housing data including Vacancy Rates
#3) The Apartment Association of Greater Los Angeles publishes Vacancy Data once or twice a year in its monthly publication “Apartment Age Magazine” (usually in the middle of the year).
#4) The USC Lusk Center produces an annual report called the USC Casden Multifamily forecast that publishes occupancy rates for Los Angeles.
#5) Large National Commercial Real Estate Companies make annual reports on Vacancy as well as a bunch of other statistics. CBRE, Marcus and Millenchap, Colliers, and JLL all do these type of reports.
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