Vacancy Balance: The Key to Profits and Happy Tenants

When it comes to pricing a building, there are two types of vacancy you need to consider: physical vacancy and economic vacancy.

Physical vacancy is straightforward. It’s your actual number of occupied versus unoccupied units.

Economic vacancy is the difference between what you’re currently charging for rent and what the market says you could be charging.

Balancing these two is key, and here’s why:

The closer you get to charging “market rents,” the lower your economic vacancy. That’s great for your income on paper, but it can also drive up your physical vacancy. Why? Because now you’re competing with every other property in the market asking for those same market rates.

In theory, market rent is determined by the perfect balance of supply and demand. In practice, this means that when demand for rental units increases and supply remains constant, rents rise. Conversely, when supply outpaces demand, rents decrease. Factors such as local economic conditions, population growth, and new housing developments all play a role in shifting this balance, directly influencing what renters are willing to pay. But in the real world, market rent is more of a moving target—and so is your strategy for filling units.

If your priority is to decrease physical vacancy quickly, you might offer incentives, like discounted rent, move-in specials, or even flexible lease terms. Other strategies could include waiving certain fees, offering free amenities like parking or internet for a set period, or providing gift cards or other perks to new tenants. This shifts you out of the market-rate competition and into a smaller pool of properties priced below market. That makes your units more attractive to renters looking for a deal. The trade-off? You’ll lease the unit faster, but the difference between the lower rent you charged and the market rent impacts your economic vacancy.

The moment you lease a unit, you're locked into the pricing for the term of the lease. This is often one year. This means that even if market rents increase during that time, you cannot adjust the rate for that unit, theoretically leaving revenue on the table. On the flip side, if market rents decrease, your locked-in rate may provide stability. However, market rents can fluctuate during the lease term. You may extend the lease with the current resident without raising rents, which would affect your economic vacancy over time while leaving your physical vacancy unchanged.

In the end, it’s all about balance—like walking a tightrope between physical and economic vacancy. Nail the sweet spot, and you’re achieving more than occupancy; you’re boosting profitability while building a community of satisfied tenants.