What is Vacancy Loss?
Vacancy Loss refers to the rental income lost by a property owner from unoccupied space, i.e. vacant units with no tenants.
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How to Calculate Vacancy Loss?
The vacancy loss refers to the dollar amount of rental income lost because of unoccupied units, where there are no tenants.
While there is a negative connotation, the vacancy loss metric can also be viewed as representing the potential rental income that could be earned in the future.
The process of calculating the real estate metric involves multiplying the vacancy assumption by the gross potential income generated by the property, i.e. the rental income if all units were occupied.
The resulting amount is the rental income lost by the unoccupied units.
When projecting the anticipated loss, assumptions are necessary regarding the conditions of the real estate market, tenant demand, property conditions (i.e. number of available space vs. unavailable space due to construction), and retention of existing tenants.
For property owners striving to reduce their vacancy loss, the following measures can be taken:
- Offer Incentives, e.g. Free Months
- Reduction to Rent, i.e. Net Effective Rent < Gross Rent
- Interior Improvements and Renovations
- Marketing and Advertising Campaigns
Vacancy Loss Formula
The formula for calculating vacancy loss is as follows.
Where:
- Gross Scheduled Income (GSI) → The gross scheduled income is the total amount of potential rental income that could be generated by commercial property, assuming the property is at full capacity, i.e. 100% occupancy.
- Vacancy Rate → The vacancy rate is the implied percentage of unoccupied units, and can be computed as one minus the occupancy rate.
