Vacancy Rates vs. Availability Rates

When you look at the two words, vacancy and availability, they appear to have the same meaning. We assume that a property claiming availability has a vacancy because we imagine an available unit to be vacant. Confusing? Let us see what these two words mean in commercial real estate and what they do separately and together. 

Vacancy Rates in CRE

Vacancy rates are a metric that determines how many units are available for lease in a complex, or how much square feet is not leased in a commercial building. This is typically determined by an easy formula of either the number of units (or square feet) available for lease vs. the total number of units (or square feet) that compose the building. So if you have 50 units available and 5 units that are vacant, then you have a 10% vacancy rate. These are especially useful if you are trying to get a loan from the bank, then you have to make sure that the rental property is bringing in 20% or more, of net operating income, than what your bank payments will be.

Jobs play a big factor in these rates and so do economic forces and the use of disposable income. As an investor, look into areas that do not have a lot of building projects. These areas will bring in more tenants for you as compared to places that have high new construction rates. Avoiding areas that only rely on one source of income is also important. Like States with the workforce predominantly focused on car manufacturing, once the plants close and move out, you will be left with tenants unable to pay rent. 

Availability Rates in CRE

Availability rates, on the other hand, are the ratio of the available spaces, it is also called the availability index. This is calculated by dividing the total square feet available by the total rentable square feet. Whether on a lease, sublease, or on sale, the available space is divided by the total inventory of occupied or unoccupied space.  

The difference between a vacancy rate and an availability rate is whether or not the property is vacant versus a property that is currently on the market for sublease. If the current tenants agree on the new terms once their lease is done, they can continue with the new agreement. If not, then that property will be vacated and become available to other interested tenants.

What these rates do separately and together

Separately, these two rates can mean different things to tenants and landlords. Available spaces can not be calculated when computing for a vacancy rate. This is because spaces that are listed could still be under construction, but the landlord can choose to advertise so that it is active in the market. Another example is that though space is occupied, the current tenant’s lease will soon be expiring. So they will advertise that the property is currently open for leasing. A period of 60-90 days is usually given to the tenants, in which they have a choice to continue their lease with a new agreement which mostly includes a rate increase or vacate. Either way, the goal of the landlord is to find a tenant before the end of the agreement. Together, they contribute to the viability of options tenants have when looking for options in the market.

If you’d like to know more about how best to interpret your submarket’s vacancy and availability rate, and what that means for your investment, please reach out to info@cbicommercial.com