Vacancy Rate
Vacancy rate is the share of a property's rentable space that is unoccupied, measured either physically (square footage empty) or economically (rent not being collected, including free rent and delinquency). Lenders apply a minimum vacancy factor — typically around 5% — to underwritten income even when a property is fully leased, to build in a cushion for turnover.
Physical Vacancy = Vacant SF ÷ Total Rentable SF · Economic Vacancy = (Gross Potential Rent − Rent Collected) ÷ Gross Potential RentPhysical vacancy can understate the real income gap: a space can be physically occupied but not paying rent during a free-rent period, or a tenant can be delinquent while still in place. Economic vacancy captures both and is generally the more conservative, lender-relevant figure.
Underwriters also compare a property's vacancy against its submarket average — vacancy well below market can signal below-market rents that are due to reset higher, while vacancy well above market typically flags a property-specific problem rather than just broader market softness.
A building that is 95% physically occupied but has 10% of tenants on free rent or delinquent carries roughly 90% economic occupancy.
Frequently asked questions
How do you calculate vacancy rate?
Divide vacant rentable square feet by total rentable square feet, then multiply by 100 — a building with 4,000 vacant square feet out of 40,000 is 10% physically vacant. Multifamily is often measured in units rather than square feet. Economic vacancy uses rent instead of space: uncollected rent divided by gross potential rent.
What is the difference between economic vacancy and physical vacancy?
Physical vacancy counts empty space; economic vacancy counts uncollected rent. A fully leased building has zero physical vacancy but still carries economic vacancy from free-rent periods, concessions, and delinquency. Economic vacancy is typically the higher of the two figures, and the one lenders underwrite, because it reflects income actually received.
What does a high vacancy rate mean?
It typically signals either a property-specific problem — deferred maintenance, weak management, above-market asking rents — or genuine submarket softness. Underwriters read the figure against the submarket average rather than in isolation: vacancy well above market usually points at the asset, while vacancy in line with a soft submarket points at the market.
What vacancy factor do commercial lenders use?
Lenders apply a minimum vacancy allowance to underwritten income even when a property is fully leased — typically around 5%, and often higher for short-lease or single-tenant assets. That deduction lowers effective gross income, which lowers NOI, which lowers the loan the property supports once the debt-service coverage test is applied.