Economic Vacancy
Also called: Economic loss, Total economic vacancy
Economic vacancy is the total percentage of gross potential rent not actually collected, including physical vacancy plus concessions, delinquency, non-revenue units, and loss to lease.
Physical vacancy counts empty units. Economic vacancy counts lost dollars, and the two diverge more than most first-pass underwriting assumes. A property can be 95% physically occupied and still collect only 85% of its gross potential rent once concessions, bad debt, employee units, and below-market leases are netted out.
Lenders and experienced buyers underwrite to economic vacancy for exactly this reason. When an offering memorandum quotes a 5% vacancy factor, the relevant question is whether that figure is physical only, and what the other four or five points of leakage look like on the trailing twelve.
How to calculate economic vacancy
Economic Vacancy = (GPR - Collected Rent) / GPRRules of thumb
- Underwrite physical vacancy and the other leakage lines separately rather than as one blended number. They respond to different management actions.
- A stabilized multifamily underwriting commonly assumes 5% to 7% economic vacancy, higher during a renovation program.
Related terms
- Gross Potential Rent (GPR)
Gross potential rent is the total annual rent a property would collect if every unit were occupied at full market rent for the entire year, with no vacancy, concessions, or delinquency.
- Loss to Lease
Loss to lease is the difference between a property's market rent and the actual in-place rent on its current leases, representing income the property is contractually unable to collect until those leases roll.
- Effective Gross Income (EGI)
Effective gross income is gross potential rent less vacancy, concessions, and credit loss, plus other income such as parking, pet fees, and utility reimbursements.