WHAT CONSTITUTES A VACANCY?

What 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.

MARKET VACANCY

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 Danter and Associates. The market vacancy rate is primarily an indication of rental performance of, and market response to, a project.

ECONOMIC VACANCY

Owners are 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, manager’s 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 rate.

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 occupancy.

IMPLICATIONS

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.

Therefore, 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 management’s ability to attract and retain effective sales personnel that can market and sell units without relying on discounts and giveaways.

A fourth is management’s 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 survey’s 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 Bureau's Market 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 fourplex structures.

Knowing this insures the report is analyzed and applied for what it does measure—not for what it doesn’t. 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 time—or not.

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