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.