Vacancy rate can be defined as the percentage of unoccupied units in rental property such as apartments or hotels or complexes at a particular point in time.
Opposite of the vacancy rate is the occupancy rate that stands for the percentage of units occupied in the rental property.
The vacancy rate helps in interpreting the rental sales, that is, a high vacancy rate indicates lower income, and a low vacancy rate indicates strong rental income.
The term vacancy rate is also used in the employment sector.
To calculate the vacancy rate, the units that are vacant in the property are divided by the total number of units in the property and then the whole outcome is multiplied by 100.
The mathematical formula will be
Vacancy rate = (Units vacant in the property/ Total number of units in the property) * 100
The vacancy rate can be used by the property owner as an analytic metric. To ascertain the competitiveness of the property and the change in the property competitiveness can be assessed by analysing the percentage change in the occupied units versus vacant units, the time duration for which units are vacant, and other rental conditions.
The vacancy rate value is also efficient in reflecting the justification for the amount charged by the rental property in the competitive space. Chiefly, the vacancy rate also extends information about the relationship between the company’s vacancy rate and the price charged.
The performance of the individual property is assessed by employing the vacancy rate. For example, real estate owners can assess the nightly vacancy rate to determine the health of the property. Also, the aggregate vacancy rate is considered an economic indicator in the market of real estate as it projects the overall health. Other factors to assess the strength of real estate are construction activity and rental rates.
Image source: © Heiko119 | Megapixl.com
While making a rental investment, it is generally advised to determine the average vacancy rate in the market to make a comparison among the different properties and assess the performance of your rental investment.
In many cases, unmanaged properties have a high vacancy rate in comparison to the market average rate. This can be interpreted as an opportunity by the rental investor to reduce the vacancy rate by changing management strategy and thus, increasing the overall profitability.
An example would be enlightening. Consider a rental investor is looking for an investment opportunity in the property market. He came across a property that had a vacancy rate of 20% and at the same time, the market average vacancy rate was 50%. After ascertaining the vacancy rate, the investor was able to determine the current performance of investment along with its future potential in the rental property market.
In some cases, the whole rental market comes down due to specific reasons, such as the breakout of COVID – 19. This has a significant impact on the return on investment and overall performance of the properties. The analysis of the vacancy rate with the market average vacancy rate allows the investors to consider other factors in the economy as well. It results in a better estimation of the future returns.
Following factors have an impact on the vacancy rate:
The vacancy rate plays a crucial role in the rental property business and allows investors to ascertain the potential returns from the rental property investment.
For instance, an investor looking for investment in an apartment might want to know the vacancy rate in order to compare the apartments vacancy rate with a similar investment opportunity. On the basis of the vacancy rate, the investor will be able to ascertain the worth of the property and its current performance.
In the employment industry, the Vacancy rate has a different meaning. It stands for the number of positions currently open in the company compared to the total positions available. Chiefly, the vacancy rate in employment projects the unavailability of employees for certain positions in the company. Due to the unavailability of employees, certain duties are not performed in the company.
The vacancy rate in employment provides information regarding the capability of the company in retaining their employees or how fast the company fill its positions.
Definition - Vacancy rate stands for the unoccupied units in the building whereas occupancy rate stands for the number of units occupied in the building.
Formula – Vacancy rate is calculated by dividing vacant units by the total unit available and then multiplying it with 100. Whereas occupancy rate can be calculated by subtracting the vacancy rate from 100.
Usage – Vacancy rate is employed to make investment-related decisions. The occupancy rate is used to ascertain the profitability and income of the real estate portfolio.