As soon as you step into the commercial real estate world, you’ll hear people talking about the commercial vacancy rate. Vacancy rates affect a lot of your decisions as a commercial investor. It might seem pretty straightforward, but there are actually a few things to note before you use a vacancy rate to determine if you’re going to invest somewhere.
What is Commercial Vacancy Rate?
Vacancy rate is how many units in a specific area became available over a certain amount of time. It’s most often expressed as a percentage. It tells you how much vacant space there was in the market over the course of a year.
Your vacancy rate is essentially the exact opposite of the occupancy rate, which tells you how much space was filled, rented, or leased over the course of a year.
Supply and Demand
Vacancy rate can indicate shifts in supply and demand. In most cases, the relationship between vacancy rate and supply and demand looks like this:
Higher vacancy rate = more spaces and options available = lower rental rates
Lower vacancy rate = less spaces and options available = higher rental rates
Determining Vacancy Rate
Vacancy rate is expressed as a percentage and calculating it is very simple. Take the number of vacant units and divide it by the total number of units in an area. Then, multiply that result by 100. To double check you’ve calculated it correctly you can make sure your occupancy rate and vacancy rate add up to 100. If they do, your math is correct!
You can calculate the vacancy rate of a large area like a city, a smaller sample like a region or neighborhood, or even the vacancy rate within a single building. Remember that overall trends in larger areas could be different than individual trends. For example, if the vacancy rate in Edmonton is low, but the vacancy rate in a specific professional building is high, the building’s rate may be the result of outdated decor, overpriced rent, or an undesirable location. These specific factors are important to consider when you’re using vacancy rate to determine whether a property is a good investment.
What Does this Mean for Investors?
The commercial vacancy rate for a city or area can help you determine a few things about a property:
First, it can help you make a purchasing decision. If there’s a high vacancy rate in the area or building, you may be looking at reduced rental rates for that property. That means less return on investment.
It can help you assess the performance of a property you already own. When you look at your specific building’s vacancy rate, you can tell if your property fits the norm for your area. If you have a significantly higher or lower vacancy rate than the average for the area, there’s probably something different about your space. Look again at rental prices, nearby businesses, and other specifics that might tell you more.
Vacancy rate is often used to assess the overall strength of the commercial real estate market. If there’s a high vacancy rate, it can be concerning for investors because there’s less income coming in. It likely indicates that businesses and individuals are struggling and are looking to save money. The good news is that this can drive down property value if you’re looking for a new investment. So, either way, there are considerations when you use vacancy rates to assess the marketplace.
Looking at investing in a commercial real estate deal, but not sure where to start? Let’s take a look at vacancy rates over coffee and find out where the best fit for you is.