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 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.