Wall Street Prep

Vacancy Loss

Guide to Understanding Vacancy Loss

Learn Online Now

Vacancy Loss

How to Calculate Vacancy Loss

The vacancy loss refers to the dollar amount of rental income lost because of the unoccupied units, where there are no tenants.

While there is a negative connotation attached to vacancy loss, it can also be viewed as the potential rental income that could be earned, rather than mere acceptance that the vacant units are lost income.

The process of calculating the vacancy loss involves multiplying the vacancy rate by the gross potential income generated by the property, i.e. the rental income if all units are occupied.

The resulting amount is the rental income lost by the unoccupied units, i.e. the vacancy loss.

When projecting the vacancy loss, assumptions must be made regarding the conditions of the real estate market conditions, tenant demand, property conditions (i.e. number of available space vs. unavailable space due to construction), and retention of existing tenants are necessary.

For property owners striving to reduce the 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.

Vacancy Loss Formula
  • Vacancy Loss = Gross Scheduled Income (GSI) × Vacancy Rate

The two inputs in the formula are the gross scheduled income and the vacancy rate:

  • Gross Scheduled Income (GSI) → The gross scheduled income metric 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 the units that are unoccupied and can be computed by subtracting one from the occupancy rate.

Vacancy Loss Calculator — Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

dl
Submitting ...

Vacancy Loss Example Calculation

Suppose the property manager of a residential building is attempting to determine the expected vacancy loss in anticipation of the upcoming year, 2023.

The residential building has a total of 100 units available for rent, with each unit priced at the same monthly rate of $4,000.

Moreover, while unrealistic, all rental lease commitments are on a 12-month basis.

  • Number of Units = 100
  • Rental Cost Per Month = $4,000
  • Lease Term = 12 Months

Given those assumptions, we can calculate the gross scheduled income (GSI) by multiplying all three assumptions.

  • Gross Scheduled Income (GSI) = 100 × $4,000 × 12 Months = $4,800,000

The $4.8 million represents the total potential rental income assuming there is 100% occupancy, as well as no concessions or discounts that affect the net effective rent paid by tenants.

Next, we’ll assume that the occupancy rate as of the present date is 95%, meaning that 95 units have a tenant that has signed their lease and will be obligated to pay rent each month.

The vacancy rate equals one minus the occupancy rate, so the vacancy rate is 5.0%.

  • Occupancy Rate = 95%
  • Vacancy Rate = 1 – 95% = 5.0%
  • Occupied Units = 95 Units
  • Unoccupied Units = 5 Units

By multiplying the gross scheduled income (GSI) by the vacancy rate, we arrive at a vacancy loss of $240,000, which represents rental income expected to be lost in 2023 unless those unoccupied units are filled.

  • Vacancy Loss = $4,800,000 × 5.0% = $240,000

Vacancy Loss Calculator

20+ Hours of Online Video Training

Master Real Estate Financial Modeling

This program breaks down everything you need to build and interpret real estate finance models. Used at the world's leading real estate private equity firms and academic institutions.

Enroll Today
Comments
guest
0 Comments
Inline Feedbacks
View all comments
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.