What Is Market Vacancy?

Securitization lenders are commanded to underwrite a property at the market vacancy rate. The accuracy in the estimatation of the true market vacancy rate for a given property is debatable.

From an appraisal and real world standpoint, it is not appropriate to blindly apply the vacancy rate for a given market to the subject property. All properties are not created equal and thusly, should not be judged equally. Whereas, if the property in question is average in terms of location, condition, quality, appeal and functionality to all of the properties in the surveyed sub-market, then the average vacancy rate for the properties surveyed would be indicative of the subjects market rental rate. However, if the subject has attributes that render it above or below the statistical average of all of the properties in the surveyed sub-market, then this is a flawed method.

The market vacancy rate for a given property can be determined using several factors. The history of the subject property, such as the occupancy rate over the last 5 years, is important. Whether it is location, appeal, condition or design; chances are the past is indicative of the future. "History does not repeat itself, but it rhymes." The direct competition is another important factor in determining the market vacancy rate. For an accurate market vacancy rate, it is wise to only weigh those properties that are truly similar to the subject property. Simply averaging all of the properties in a one quarter mile radius can also be misleading, especially if they are not all similar to the subject property.

In conclusion, properties can be both unduly penalized and credited by simply using the average of a survey to estimate the market vacancy rate. To be accurate, logic and analysis must enter in to the determination of the appropriate market vacancy rate.

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