Economic Vacancy vs Physical Vacancy in an Apartment Building, and How to Read Both Off the Books

What is economic vacancy in an apartment building?

Economic vacancy is the share of an apartment building's possible rent that was not collected. It counts empty units, move-in specials and unpaid rent together, in dollars.

The base is gross potential rent, the rent if every unit were full and paid. At Birch Way that is $72,500 a month: 50 units at $1,450. Every dollar of it that did not reach the bank in a month is economic vacancy, whatever the reason. The dollars behind this rate are the lines of the gap table in rent roll vs bank statement.

What is physical vacancy in an apartment building?

Physical vacancy is the share of units that are empty. Birch Way has 3 empty units of 50, so physical vacancy is 6% and physical occupancy is 94%.

Physical vacancy reads off the rent roll alone. Count the units with no lease and divide by all units. Birch Way: 3 of 50, 6%. It says nothing about what the 47 rented units paid.

What is the difference between physical vacancy and economic vacancy in an apartment building?

Physical vacancy counts units. Economic vacancy counts dollars. A building can be 94% full and still collect a smaller share of its rent, because some rented units paid less than full rent or nothing.

Birch Way, 50 units, invented data

In the standing month, the one on our home page calculator, Birch Way has no specials and no unpaid rent. The only rent it misses is the $4,350 of the 3 empty units, so both rates are 6%. In the second month the same 3 units are empty, and 2 more things happen. The rates come apart.

How do you calculate economic vacancy for an apartment building?

Add vacancy loss, concessions and unpaid rent for the month. Divide by the rent the building would earn if full. Birch Way: $6,400 divided by $72,500 is 8.8%.

In words: rent not collected is vacancy loss plus concessions plus unpaid rent. Economic vacancy is rent not collected divided by rent if full. Here is Birch Way's second month, worked top to bottom.

Birch Way, a second month, invented data

Running costs are $27,000 in both months. Net operating income, what is left after running costs and before the loan, is $39,100 in the second month against $41,150 in the standing month. The $2,050 difference is the specials and the unpaid rent.

To run your own building, use the vacancy loss calculator.

What is economic occupancy in an apartment building?

Economic occupancy is rent collected divided by rent if full. It is 100% minus economic vacancy. Birch Way collected $66,100 of $72,500, so economic occupancy is 91.2%.

The 2 rates always add up to 100%. Birch Way's second month: 8.8% economic vacancy, 91.2% economic occupancy. The standing month: 6% and 94%, the same as the physical rates, because every rented unit paid full rent.

What makes economic vacancy higher than physical vacancy in an apartment building?

4 things: move-in specials and credits, rent that was charged and not paid, units kept off the market such as a model or staff unit, and leases signed below market rent.

• Move-in specials and credits. The lease rent is on the rent roll, and the tenant pays less this month by agreement. Birch Way's second month: 2 at $300.
• Rent charged and not paid. The unit is rented and counts as occupied, and the money did not arrive. Birch Way's second month: 1 unit, $1,450.
• Units kept off the market, such as a model or a staff unit. They are not for rent, so they earn nothing, and some rent rolls do not count them as empty.
• Leases signed below market rent. The unit is full and paid, and still earns less than its share of rent if full.

Each of the 4 lowers the dollars without changing the count of empty units. Rent that stays unpaid moves on to unpaid rent, evictions and write-offs.

Where does each vacancy number come from in an apartment building's books?

Rent if full, vacancy loss and concessions are income accounts on the P&L. Unpaid rent is the balance tenants owe at month end. Rent collected is the rent deposited in the bank.

The first 3 are lines, the fourth is a balance, the fifth is cash. Where these lines sit on the report is shown in an apartment building profit and loss. Every dollar of economic vacancy comes straight off net operating income for an apartment building.

Whether lost rent changes the tax return is a question for your CPA.

Can economic occupancy be higher than physical occupancy in an apartment building?

Yes, for a month. When tenants pay rent owed from earlier months, or pay ahead, the cash collected can be a larger share of rent if full than the share of units rented.

Say Birch Way's late tenant pays the $1,450 the month after it was due, together with that month's rent. That month the bank collects more than its own rent roll asked for, so economic occupancy for the month comes out above physical occupancy. Over the 2 months together, the rates line up again.