CONSTITUTES A VACANCY?
constitutes a vacancy? It depends on who you ask and what is
being surveyed. Vacancies fall into two primary categories:
market vacancies and economic vacancies.
Most apartment managers are
primarily concerned with market vacancies. The market vacancy
rate is the number of units available for rent divided by the
total number of rentable units. This market vacancy rate is the
primary rate quoted in vacancy surveys from various sources,
including The Danter Company. The market vacancy rate is
primarily an indication of rental performance of, and market
response to, a project.
generally more concerned with economic vacancies. An economic
vacancy is generally defined as a unit not collecting rent or
generating book revenue. Such economic vacancies include a model
unit, managerís unit, discounted units, and vacant units
being prepared for occupancy. In addition,
an unrentable unit that would require more than the standard
preparation for occupancy (unrentable in its present condition)
is also considered an economic vacancy.
Reported vacancies can vary widely depending on whether they
are calculated based on market vacancies or economic
vacancies. An apartment community that is 100%
occupied based on a market vacancy survey can still show
economic vacancies when model and manager units are
considered. In addition, due to normal turnover, some units may
be rented but not occupied, thus raising the economic vacancy
The time necessary to prepare a
unit for occupancy must be considered in calculating economic
vacancy. In a community that typically
takes one week to prepare a unit for occupancy every
unit turned over cannot collect rent for a week, even if a tenant
is waiting for that unit. Dividing that week
over a 52-week year equals a 1.9% economic vacancy rate for that
unit for that year. Assuming a 50% turnover rate for the
community, this yields an economic vacancy rate of 0.9%, even at
100% market occupancy with tenants on a waiting list. Increasing
the time necessary for unit preparation raises this rate.
In addition, many surveys
calculate rent incentives and giveaways into economic vacancy
rates as well. Giving away a
free month as a rent incentive is economically equivalent
to having that
unit vacant for that month, creating an 8.3% economic vacancy
rate for that unit over a 12-month year. Assuming a 50% turnover
rate creates a 4.3% economic vacancy rate for the community if
every incoming tenant is offered a free month, even at 100%
Market vacancy rate and
economic vacancy rate can present entirely different market
perspectives. Market vacancy rate is strictly a measure of performance regarding filling
available units. Economic vacancy rate is a measure
of dollar loss against ideal financial performance, comparing
actual performance to an ideal performance in which all existing
(as opposed to available) units are generating the maximum
income all the time.
economic vacancy rates may not be as indicative of market
conditions as they are of management effectiveness. Economic
vacancies are impacted by a wide variety of management
practices, one of which is using a model unit. A second is
giving an on-site manager free or reduced rent. A third is
managementís ability to attract and retain effective sales
personnel that can market and sell units without relying on
discounts and giveaways.
A fourth is managementís
ability to turn over units in a minimal amount of time (while
the average is about one week, we have visited communities which
take over three
weeks). A fifth management factor regarding economic vacancies
is the ability of ownership and management to work together to
set realistic book rents. Ownership that
continues to set unrealistic and unachievable book rents may be
forcing itself into experiencing not only high economic
vacancies, but ultimately high market vacancies as well, despite
the best efforts of a quality management team.
Both rates are important, as
they measure characteristics of the market or management, but
neither alone presents a complete picture. As a result, it
becomes even more important to know how a survey is conducted
and what methodology is being used to generate the numbers and
statistics upon which key decisions are based. Mistaking an
economic vacancy rate for a market vacancy rate may make a
market appear as if it is not performing, while mistaking a
market vacancy rate for an economic vacancy rate may make
management appear to be performing better than it is.
In addition, knowing a
surveyís universe is key to interpreting the resulting rate.
If the survey is a sample, it is important to identify the
criteria used to select the sample and also the accompanying
margin of error. For example, most US Census Bureau housing
statistics generally quote rental housing vacancies for all
rental housing regardless of age, condition, or type (mobile
home, single-family, etc.). Any vacancy rate for those
categories, when assumed to reflect modern apartment
communities, can be misleading.
Also, rental surveys often
categorize housing units by the number of units in the
structure, regardless of whether it is part of a larger complex.
This is particularly important for such reports as the Census
Absorption of Apartments report, which includes as apartment
units only those which are in structures of five units or more.
As a result, the report would exclude a new project built in
Knowing this insures the report
is analyzed and applied for what it does measureónot for what
it doesnít. Vacancies can be measured according to various
standards. Knowing which standard applies to which situation can
be the difference between entering a market at the right
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