What Is a Vacancy Rate? Definition, What They Mean and Calculation

What Is a Vacancy Rate?

The vacancy rate is the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time.

A vacancy rate is the opposite of the occupancy rate, which is the percentage of units in a rental property that are occupied. High vacancy rates indicate that a property is not renting well while low vacancy rates can point to strong rental sales.

In addition to being used for real estate analysis, vacancy rates can also be applied to the employment sector.

Understanding Vacancy Rates

Vacancy rates are a very important determinant for property owners because they tell them how their buildings are performing when compared to the area's vacancy rate. These rates are also economic indicators as they paint a portrait of the broad market conditions.

In real estate, the vacancy rate most often represents units that are vacant and ready to be rented, units that have been turned off upon the exit of a tenant, and units that are not currently rentable because they are in need of repairs or renovations. Low vacancy rates are considered positive because it generally means people want to live in a particular area or building, while higher rates mean the opposite.

The rate is calculated by taking the number of vacant units, multiplying that number by 100, and dividing that result by the total number of units. The vacancy rate and occupancy rate should add up to 100%. So if an apartment building has 300 units, and 30 units are unoccupied, it means the vacancy rate is 10%.

In order to be used effectively, vacancy rates for one property should be used to compare to a similar one. It is not a fair comparison when putting a commercial office building next to a three-story apartment complex. Similarly, there may be different factors at play between vacancy rates for a small town and a major city, so these two areas may not be suitable to compare together.

Real Estate Vacancy Rate Analysis

A property owner can use vacancy rates as an analytic metric. Changes in the percentage of vacant units versus occupied units, the length of time occupied units are remaining active, or other rental conditions can provide guidance on how competitive a property owner has made the property. If a property owner charges significantly more or less than the rest of the rental market, this may be reflected in the overall vacancy rates. It can also provide information about the effects of price changes or advertising on unit occupancy.

While vacancy rates are commonly used to assess an individual property's performance, such as a hotel monitoring its nightly vacancy rate, aggregate vacancy rates are also used as economic indicators of a real estate market's overall health. Many firms that service the commercial real estate sector gauge the strength of the overall industry using metrics such as vacancy rates, rental rates, and construction activity.

In May 2019, real estate firm Jones Lang LaSalle reported that the U.S. real estate market continued to maintain its steady trends from 2018, with vacancy rates near historic lows. According to the report, office market vacancies hit about 5% in the year's first quarter. In the previous year, the firm projected a development boom that would outpace occupancy gains despite strong overall demand in the nation's office market. Of the largest metropolitan regions in the country, San Francisco's office market boasted the lowest vacancy rate in 2018, according to the data, at only 8.1%. New York's Westchester County, meanwhile, registered the highest vacancy rate at 24.9%.

Residential Vacancy Data

The U.S. Census Bureau compiles its residential vacancy data in a quarterly report that provides three key figures: the rental vacancy rate, homeowner vacancy rate, and homeownership rate. In April 2019, the bureau reported national vacancy rates at 7% for rentals, while homeowner vacancy rates sat at 1.4% for the year's first quarter.

Both figures have remained fairly sustained in recent years after falling from all-time highs reached during the U.S. housing crisis, when rental vacancies peaked at 11.1% in 2009 and homeowner vacancies peaked at 2.9% in 2008.

The U.S. Census Bureau also collects data for the quarterly report regarding rental prices and property information. Much like data for commercial property markets, this information can be used—in conjunction with other information—to help determine the health of an economy's residential real estate market by examining changes in the number of units available and the average prices of available or occupied units.

Investors and Vacancy Rates

As noted above, vacancy rates play a big part in business and can help investors determine whether they're making a good move by putting their money into certain real estate deals.

For example, someone considering a large apartment complex as an investment may want to look at the building's vacancy rate before signing a contract. By comparing that building's vacancy rate with other comparable properties in the area, the investor can determine its performance and decide whether it's worth purchasing.

Vacancy Rates in Employment

In employment, the vacancy rate applies to the number of open positions a company currently has in comparison to the total number of positions available throughout the company. In other words, an employment-related vacancy rate can indicate the proportion of positions a company has allocated for the performance of certain duties that do not currently have an employee functioning in that space.

When related to other employment metrics, such as turnover or employee longevity, a vacancy rate can provide indications as to how successful a company is at advertising and filling open positions and retaining current employees.