Rental vacancy rate

Rental Vacancy Rate: Definition, Formula, Example, and FAQs

What Is Rental Vacancy Rate?

The rental vacancy rate is a crucial statistic in real estate and housing economics that measures the percentage of all available rental units in a specific market that are unoccupied and ready for immediate occupancy. It provides a snapshot of the rental housing market's health, indicating the balance between supply and demand for rental properties. A higher rental vacancy rate typically suggests an oversupply of available units or weak demand, while a lower rate points to high demand and potentially limited availability. This rate is a key economic indicator used by investors, policymakers, and analysts to understand market conditions and predict future trends.

History and Origin

The systematic collection and reporting of housing vacancy data, including the rental vacancy rate, gained prominence in the United States to inform housing policy and economic analysis. The U.S. Census Bureau initiated the Housing Vacancy Survey (HVS) in 1956, which officially began quarterly data collection in the first quarter of 1965. This survey provides consistent, national-level data on rental and homeowner vacancy rates. The rental vacancy rate has since become a standard metric, serving as a component of the index of leading economic indicators, used by the federal government and economic forecasters to gauge the current economic climate.¹⁵

Key Takeaways

• The rental vacancy rate is the percentage of available rental units that are vacant and ready for occupancy.
• It serves as a key indicator of the health and balance of supply and demand within a rental market.
• A rising rental vacancy rate can suggest an oversupply of units or declining rental demand, potentially leading to lower rental income or concessions for landlords.
• A falling rental vacancy rate indicates strong demand and limited supply, which may allow landlords to increase rents.
• This metric is vital for market analysis, investment decisions, and understanding broader economic trends like inflation.

Formula and Calculation

The rental vacancy rate is calculated by dividing the total number of vacant rental units available for rent by the total number of rental units in the market (both occupied and vacant available for rent), then multiplying by 100 to express it as a percentage.

The formula is expressed as:

Where:

• Number of Vacant Units Available for Rent: Refers to rental units that are empty and actively being marketed for rent.
• Total Rental Units: The sum of all occupied rental units and those vacant units that are available for rent. Units that are vacant but not available for rent (e.g., undergoing renovation, held for occasional use, or used for storage) are typically excluded from both the numerator and denominator.

Interpreting the Rental Vacancy Rate

Interpreting the rental vacancy rate involves understanding its implications for various stakeholders in the housing market. A low rental vacancy rate, often below 5-7% depending on the specific market and property type, generally signifies a tight market where demand outstrips supply. In such conditions, landlords may find it easier to attract tenants, reduce concessions, and potentially increase rents. Conversely, a high rental vacancy rate, perhaps above 7-10%, indicates a soft market with more available units than renters. This scenario often leads to increased competition among landlords, longer vacancy periods, and downward pressure on rents, potentially affecting an investment property's cash flow.

These rates can vary significantly by region, property type (e.g., single-family homes vs. apartments), and even submarket. Therefore, a national average, such as the data provided by the Federal Reserve Bank of St. Louis¹⁴, should be considered in conjunction with local market specifics.

Hypothetical Example

Consider a hypothetical city, Metropolis, with a total of 50,000 rental units. A recent survey reveals that 3,500 of these units are currently vacant and listed as available for rent.

To calculate the rental vacancy rate for Metropolis:

1. Identify the number of vacant units available for rent: 3,500

2. Identify the total rental units: 50,000

3. Apply the formula:

   $$\text{Rental Vacancy Rate} = \left( \frac{3,500}{50,000} \right) \times 100\%$$ $$\text{Rental Vacancy Rate} = 0.07 \times 100\%$$ $$\text{Rental Vacancy Rate} = 7\%$$

In this example, Metropolis has a rental vacancy rate of 7%. For a property owner considering purchasing an investment property in Metropolis, this 7% rate suggests a relatively balanced market. While there are vacancies, it's not a severely oversupplied market, which could indicate reasonable prospects for tenant placement and rental income.

Practical Applications

The rental vacancy rate is a critical metric with diverse practical applications across financial and economic sectors:

• Real Estate Investment: Investors use the rental vacancy rate to assess the attractiveness of potential investment property acquisitions. A low vacancy rate in a target market signals strong rental demand, which can translate to consistent cash flow and potential rent growth. Conversely, high vacancy rates might deter investors due to increased risk management concerns.
• Monetary Policy and Inflation: Central banks, such as the Federal Reserve, monitor housing market indicators, including rental vacancy rates, as part of their broader assessment of economic health and inflationary pressures. Persistent low vacancy rates and rising rents can contribute to shelter inflation, a significant component of overall inflation measures like the Consumer Price Index (CPI).¹¹, ¹², ¹³ This can influence decisions regarding interest rates.¹⁰
• Urban Planning and Development: Local governments and urban planners analyze vacancy rates to determine the need for new housing developments, assess the effectiveness of existing housing affordability programs, and guide zoning decisions. For example, if a city experiences chronically low vacancy rates, it may indicate a need for policies that encourage more rental housing construction.
• Property Management: For property management companies, tracking vacancy rates is essential for operational efficiency. It helps them set competitive rents, develop effective marketing strategies, and manage tenant retention efforts. High vacancy rates can prompt a review of pricing or amenity offerings.
• Economic Forecasting: Economists and analysts use the rental vacancy rate as an input for forecasting economic conditions. Fluctuations in the rate can signal shifts in employment, population growth, and consumer confidence, all of which impact the broader economy.

Limitations and Criticisms

While a valuable metric, the rental vacancy rate has several limitations and criticisms that warrant a nuanced understanding. One major challenge is that the reported rate often includes units that are technically vacant but not truly "available" for rent, such as those undergoing extensive renovations, units being held for seasonal use, or properties involved in legal disputes. This can inflate the perceived vacancy, not accurately reflecting the immediate rental supply.⁹

Additionally, national or large-area statistics may mask significant variations at the local level. A healthy national rental vacancy rate might conceal critically low availability in specific high-demand metropolitan areas or, conversely, severe oversupply in struggling smaller towns. The data collection methodology can also introduce discrepancies; for instance, the U.S. Census Bureau's Housing Vacancy Survey (HVS) defines "vacant for rent" broadly, which might differ from how a specific property management firm or a local Multiple Listing Service (MLS) tracks vacancies. The accuracy can also be affected by self-reported data in surveys.⁸

Furthermore, the rental vacancy rate alone does not fully capture the quality or affordability of available units. A high vacancy rate might exist concurrently with a severe shortage of affordable housing for lower-income households, as highlighted by reports from organizations like the Harvard Joint Center for Housing Studies, which frequently points to issues of rising housing affordability burdens even as overall vacancy rates fluctuate.⁴, ⁵, ⁶, ⁷ Therefore, interpreting the rental vacancy rate requires considering other factors like rent levels, income demographics, and the condition of the housing stock.

Rental Vacancy Rate vs. Homeownership Rate

The rental vacancy rate and the homeownership rate are two distinct but related metrics that provide insights into different segments of the overall housing market.

The rental vacancy rate focuses exclusively on the rental segment, indicating the percentage of available rental units that are unoccupied. It reflects the supply-demand balance for properties intended for lease. A high rental vacancy rate suggests a renter's market, while a low rate indicates a landlord's market.

In contrast, the homeownership rate measures the percentage of occupied housing units that are owner-occupied. It reflects the prevalence of homeownership versus renting within a population. These two rates often move in inverse directions, though not always in a perfectly correlated manner. For example, during periods of economic uncertainty or high interest rates for mortgages, some individuals who might otherwise purchase a home may remain renters, influencing both the rental market and the homeownership rate.³

FAQs

What is considered a healthy rental vacancy rate?

A healthy or balanced rental vacancy rate typically falls between 5% and 8%. A rate below this range suggests a tight market favoring landlords, while a rate above it indicates an oversupplied market favoring renters. However, what is "healthy" can vary by local market dynamics, property type, and economic conditions.

How does the rental vacancy rate impact rent prices?

Generally, a low rental vacancy rate indicates high demand and limited supply, allowing landlords to increase rent prices. Conversely, a high rental vacancy rate suggests an oversupply of units, which often leads to landlords lowering rents, offering concessions, or increasing incentives to attract tenants.

Who tracks the rental vacancy rate?

In the United States, the U.S. Census Bureau is the primary entity that tracks and publishes the national and regional rental vacancy rates through its Housing Vacancy Survey (HVS).² Other organizations, such as the Harvard Joint Center for Housing Studies¹, various real estate data providers, and local housing authorities, also analyze and report on rental market conditions, often utilizing or supplementing Census Bureau data.

Is a high rental vacancy rate good or bad?

It depends on perspective. For renters, a high rental vacancy rate is generally good as it means more choices and potentially lower rents or better deals. For landlords and property management companies, it is generally bad as it means more competition, longer periods of vacancy, and potentially reduced rental income and cash flow. For the overall economy, an extremely high rate might signal underlying economic weakness or overbuilding.