Underwriting
Where Vacancy Assumptions Come From
Vacancy in a model usually arrives as a round number borrowed from convention, but the figure blends physical vacancy, credit loss and turnover time, which behave differently.
Almost every property model contains a vacancy assumption, and in a large share of them the number is a convention rather than an observation. Understanding what it is meant to represent changes how it should be set.
Three different losses sit inside one line
Physical vacancy is time when a unit is empty. Credit loss is rent that was owed and never collected. Concessions are rent given away to secure a signature.
These behave differently across a cycle. Physical vacancy rises when demand softens, while credit loss tracks tenant financial stress, and the two do not always move together.
Collapsing all three into a single figure hides which one is moving. A model that separates them tells you whether a shortfall came from empty units or from tenants who stopped paying.
Market vacancy is not your vacancy
Published submarket vacancy describes a set of buildings, weighted toward larger professionally managed ones. A small older building may experience conditions that the aggregate never shows.
Property-level vacancy also depends heavily on management. Two identical buildings across the street from each other can differ substantially based on how quickly turns are completed and calls answered.
Using a market figure as a property assumption is therefore a starting point rather than a conclusion. The operating history of the specific building, where it exists, is better evidence.
Turnover time is the part people underestimate
A unit is not vacant only while it is being marketed. It is vacant from the day the previous tenant leaves until the day the next tenant's rent starts.
That window includes cleaning, repairs, any renovation, marketing, showings, application processing and a lease start date that rarely aligns neatly with the day the unit became ready.
Because the window is a chain of steps, delays compound. A contractor arriving a week late pushes marketing, showings and the lease start by the same week.
Stabilised and lease-up vacancy are separate questions
A stabilised assumption describes ongoing operations once a building is full. A lease-up assumption describes filling a building that is not yet full, and the two are unrelated.
Value-add plans blur this. A renovation programme deliberately empties units, so the property carries elevated vacancy by design during the work and returns to a stabilised figure afterwards.
Modelling both phases separately prevents the common error of applying a comfortable stabilised figure to a period when units are being taken offline on purpose.
How to set the number defensibly
Start from the property's own history if it has one, adjusted for anything that changed. Where no history exists, use the tightest comparable set available rather than a submarket average.
Then test the assumption rather than defending it. If the deal only works at an unusually low vacancy figure, the assumption is doing work the property may not support.
Documenting the reasoning matters as much as the figure. A number with a stated basis can be revisited later; a borrowed round number cannot be argued with or corrected.
