Understanding Rental Vacancy Rates for Real Estate Investing in 2023
For landlords, rental vacancy rates play a critical role in determining the success of their real estate investments.
These rates are an essential indicator of the supply and demand for rental properties in a particular area, providing valuable insights into setting competitive prices, identifying potential growth opportunities, and making informed investment decisions.
This article will cover everything you need to know about rental vacancy rates, from understanding what they are and how they're calculated to exploring historical trends, projecting potential capital growth, and determining what is a "good" vacancy rate.
We will also address any common misconceptions and provide current projections for 2023, giving you the tools to make informed investment decisions and stay ahead in the competitive real estate market.
What are rental vacancy rates?
Rental vacancy rates refer to the percentage of rental properties unoccupied in a particular geographic area at a specific time.
These rates serve as an indicator of supply and demand in the property leasing market. Real estate investors and landlords rely on them to make informed decisions regarding pricing, investment opportunities, and potential growth.
Low vacancy rates typically indicate high demand for rental properties in a particular area leading to higher rental prices and more competition for available units. On the other hand, high rental vacancy rates can also suggest an oversupply of rental units, which can result in lower rental prices and less competition for available homes.
It's important to note that what constitutes a low or high vacancy rate can vary depending on the location and other factors. In some areas, a vacancy rate of 5% may be considered high, while in others, a vacancy rate of 10% may be regarded as normal.
Ultimately, the optimal vacancy rate for a particular area depends on various economic and demographic factors.
How homeowner vacancy rates connect to rental vacancy rates
Homeowner vacancy rates represent the percentage of owner-occupied properties that are unoccupied and for sale in a particular area.
Like rental vacancy rates, they can provide valuable insights into the overall health of the real estate market and help investors and landlords make informed decisions.
Homeowner and rental vacancy rates can influence each other and impact the housing market in the following ways.
Housing supply and demand
A low homeowner vacancy rate indicates a high demand for owner-occupied properties, which can result in increased property values and a more competitive market.
Conversely, a high homeowner vacancy rate may suggest a weaker demand for owner-occupied properties, potentially leading to lower property values.
These fluctuations can affect the rental market as well. High demand for owner-occupied properties may lead to a tighter rental market with lower rental vacancy rates, as people might struggle to find homes to purchase and choose to rent instead.
The balance between homeowner and rental vacancy rates can impact rental and property pricing. For instance, if homeowner vacancy rates are high and rental vacancy rates are low, it might indicate that people are choosing to rent rather than buy, increasing rental prices.
Alternatively, if both homeowner and rental vacancy rates are high, property prices may decline due to an oversupply of available units in both markets.
Changes in homeowner vacancy rates can signal shifts in the real estate market. For example, if homeowner rates decrease while rental vacancy rates remain stable or increase, it might suggest that more people are transitioning from renting to homeownership.
On the other hand, if homeowner vacancy rates increase while rental vacancy rates decrease, it could indicate that more people opt to rent rather than purchase properties.
Understanding these market shifts can help landlords and investors identify potential opportunities and trends in the housing market.
By monitoring homeowner and rental vacancy rates, landlords and investors can better understand the housing market's dynamics. These insights can help identify market trends, inform pricing strategies, and guide investment decisions, ultimately leading to more profitable real estate ventures.
Trends in US rental vacancy rates
Over the past decade, the US has experienced a general decline in rental vacancy rates, with recent fluctuations influenced by various factors such as the COVID-19 pandemic. The US Rental Vacancy Rate for Q4 2022 was 5.80%, a slight increase compared to the previous year’s Q4 2021 at 5.60% — but a notable decrease from Q4 2020's 6.5%.
Historical trends in the national rental vacancy rate provide valuable insights into the housing market dynamics. Several factors have contributed to these trends.
The first is the economic recovery following the 2008 financial crisis. As the economy improved, more people entered the job market, leading to an increased demand for housing, especially rental properties, and a decrease in rental vacancies as more people were able to afford rental properties.
Another contributing factor is the increasing popularity of renting as opposed to homeownership. Due to the high cost of homeownership, stricter mortgage lending standards, and a growing preference for a more flexible lifestyle, many people are opting to rent rather than buy, which has led to a surge in demand for rental properties, driving down vacancy rates.
The COVID-19 pandemic has also played a significant role in shaping the trends in rental vacancy rates. During the early stages of 2020, many people faced job losses, furloughs, and income reductions, leading to financial uncertainty, resulting in some renters moving in with family members or roommates and temporarily increasing vacancy rates in certain areas. However, the rental market quickly adapted, with landlords offering incentives like reduced rent or rent-free months to attract and retain tenants.
As the pandemic progressed and remote work became more prevalent, many people moved from expensive urban centers to more affordable suburban and rural areas, seeking larger living spaces and a lower cost of living. This shift in population led to a surge in rental demand in these areas and contributed to the decline in vacancy rates.
Federal and state governments implemented various relief measures to tackle the economic impact caused by the pandemic. These included eviction moratoriums and rental assistance programs, which helped struggling renters stay in their homes and maintain the demand for rental properties.
Demographic factors also play a role in shaping rental vacancy rate trends. The millennial generation, for instance, has shown a preference for renting over homeownership, often due to financial constraints and a desire for mobility. As millennials continue to enter the rental market, the demand for rental homes is expected to remain strong, further contributing to lower vacancy rates.
The importance of understanding rental vacancy rates
Evaluating rental vacancy rates offers landlords and real estate investors insights into property management and investment decisions. Monitoring these rates is a good idea, for several reasons:
- Competitive pricing: Vacancy rates allow landlords and investors to set competitive rental prices. A high vacancy rate suggests market saturation, necessitating lower rents to attract tenants. A low vacancy rate implies that raising rents is possible without impacting demand. Keeping an eye on vacancy rates helps to optimize profits.
- Informed investment decisions: Analyzing vacancy rates enables real estate investors to gauge rental property demand in a particular area. Low vacancy rates signal high demand, making the area a potentially lucrative investment opportunity. Conversely, high vacancy rates may imply an oversupply of rental units and reduced financial viability for new investments. Vacancy rates also allow investors to compare various investment prospects and identify the highest return on investment.
- Growth opportunities: Examining vacancy rates helps investors pinpoint areas with high demand and limited supply. For instance, low vacancy rates in a specific area might prompt investors to develop new properties to capitalize on the strong demand.
Knowledge of rental vacancy rates equips real estate investors with valuable insights for decision-making in the rental property market.
How to calculate rental vacancy rates
To calculate rental vacancy rates, first divide the total number of unoccupied rental units in a specific area by the total number of available rental units. This will yield the average vacancy rate for the rental market as a percentage.
For example, let's say there are 500 rental units in a given location and 50 of them are vacant. The rental vacancy rate in this case would be 10% (50 divided by 500).
To simplify this calculation process, use Azibo's vacancy rate calculator.
What is a "good" rental vacancy rate?
A good vacancy rate is a level at which there is a balance between supply and demand in the rental market, meaning that there are enough properties available to meet the needs of renters in a particular area but not so many that there are a significant number of unoccupied homes. What constitutes a good rental vacancy rate varies on location and other factors, such as the type of property and the overall state of the economy.
Generally, a 5% to 10% rental vacancy rate is considered healthy. This means there are enough available properties to meet demand but not so many that there is an oversupply of units.
A vacancy rate below 5% suggests that the demand for properties exceeds the available supply, which can drive up rental prices and make it difficult for potential tenants to find suitable housing.
On the other hand, a vacancy rate above 10% can indicate too many rental properties are available relative to demand, leading to lower rental prices and reduced profits for landlords and real estate investors.
It is important to note that the definition of a "good" rental vacancy rate can vary depending on the property's location and type. A lower vacancy rate may be considered healthy in urban areas with a high demand for rental properties. In contrast, a higher vacancy rate may be more acceptable in rural areas with a smaller population and lower demand for properties.
Additionally, the type of property can also affect the rate. For example, areas with high-rise apartment buildings may have a different acceptable rate than areas with single-family homes.
Overall, a "good" rental vacancy rate is one that allows real estate investors to maintain profitable rental properties while meeting renters' needs in a particular area.
Is a high vacancy rate bad?
A high vacancy rate can indicate poor property management, ineffective marketing strategies, or undesirable location. That said, there are several situations where a high vacancy rate may be beneficial — or at least not a negative indicator — for investors:
- Renovation and repairs: A high vacancy rate allows landlords to renovate and repair properties without the hassle of moving tenants around. Renovations and repairs can improve the quality of the property and increase its value, which can translate to higher rental income in the future.
- Market fluctuations: High vacancy rates can also be a result of market fluctuations, which are beyond the control of landlords and investors. A sudden oversupply of rental properties can lead to an increase in rates. However, this can signal that the market is correcting itself, and the oversupply will eventually balance out. In such cases, landlords and investors can wait out the market fluctuations and make the most of the situation.
- Rebranding and repositioning: A high vacancy rate can also allow landlords and investors to rebrand and reposition their rental properties. They can take advantage of the downtime to make changes to the property, such as redesigning or adding amenities, which can help attract new tenants. This can increase the overall value of the property and boost rental income.
Landlords must evaluate the reasons behind the high vacancy rate and take appropriate action to address the issue. However, in certain situations, a high rate can allow landlords and investors to make necessary changes to the property and increase its overall value.
The bottom line? Rental vacancy rates should not be the sole predictor of ROI or capital growth. Other factors, such as population growth, economic trends, and changes in housing policies, can also influence property values. For example, a decrease in population growth or a decline in the local job market may negatively impact rental demand and property values, even if vacancy rates remain low.
Additionally, rental vacancy rates may not accurately reflect the demand for specific properties or neighborhoods — they only measure the number of vacant units as a percentage of the total rental market.
Rental vacancy rate projections for 2023
Based on current trends and economic factors, rental vacancy rates in 2023 are expected to remain relatively low, continuing the trend of a tightening rental market.
The ongoing economic recovery, combined with the increasing preference for renting over homeownership, is anticipated to maintain strong demand for rental properties.
The remote work trend, driven by the COVID-19 pandemic, is also expected to persist, prompting more people to seek affordable housing options in suburban and rural areas, further contributing to the decline in vacancy rates.
Additionally, as millennials continue to enter the rental market, the demand for rental properties will likely remain high.
However, any fluctuations in economic conditions, government policies, or unexpected events could impact these projections. Real estate investors should closely monitor all industry factors to make informed decisions about the rental market and housing investments.
Understanding rental vacancy rates in 2023 and beyond
By providing insights into market demand, setting competitive rental rates, and identifying growth opportunities, rental vacancy rates enable landlords and investors to make informed decisions and maximize their profits.
As we move further into 2023, staying updated on current trends and economic factors that may impact the rental market is crucial.
With the help of our vacancy rate calculator, you can calculate rental vacancy rates and gain a competitive edge in the ever-evolving real estate market. Stay informed, make strategic decisions, and capitalize on opportunities to ensure success in your real estate investments.
Vacancy rate FAQs
What is the best rental vacancy rate?
The ideal rental vacancy rate strikes a balance between supply and demand in the rental market, allowing landlords and real estate investors to maintain profitable properties while meeting the needs of renters in a given area.
Generally, a 5% to 10% rental vacancy rate is considered healthy, indicating a sufficient supply of rental properties without a significant oversupply leading to vacancies. However, the optimal rental vacancy rate can vary depending on factors such as location, property type, and overall economic conditions.
To achieve the best rental vacancy rate, it's essential for landlords and investors to closely monitor market trends and adjust their strategies accordingly.
Which US cities have the highest rental vacancy rates?
According to the US Census Bureau, of the 75 largest metropolitan statistical areas (MSAs) in the US, the highest rental vacancy rates as of Q1 2023 are in:
- Charleston-North Charleston-Summerville, SC: 15.3%
- Baltimore-Columbia-Towson, MD: 12.8%
- Houston-The Woodlands-Sugar Land, TX: 12.3%
- Birmingham-Hoover, AL: 11.9%
- North Port-Bradenton-Sarasota, FL: 11.8%
- Little Rock-North Little Rock-Conway, AR: 11.2%
- Indianapolis-Carmel-Anderson, IN: 10.9%
- Raleigh, NC: 10.9%
- Dallas-Ft. Worth-Arlington, TX: 10.8%
- Minneapolis-St. Paul-Bloomington, MN-WI: 10.1%
These metropolitan areas have a notably high percentage of unoccupied rental properties, suggesting an excess of available housing or reduced demand in their respective rental markets during this time period.
Which US cities have the lowest rental vacancy rates?
According to the US Census Bureau, of the 75 largest metropolitan statistical areas (MSAs) in the US, the lowest rental vacancy rates as of Q1 2023 are in:
- Louisville/Jefferson County, KY-IN15: 1.2%
- Worcester, MA: 1.7%
- Cleveland-Elyria, OH: 2.5%
- Rochester, NY: 2.5%
- Boston-Cambridge-Newton, MA-NH: 2.7%
- Columbia, SC: 2.9%
- Fresno, CA: 2.9%
- Syracuse, NY: 3.1%
- Akron, OH: 3.3%
- San Diego-Carlsbad, CA: 3.3%
These metropolitan areas have a notably low percentage of unoccupied rental properties, suggesting a lack of available housing or increased demand in their respective rental markets during this time period.
What does a vacancy rate of 2% mean?
A vacancy rate of 2% indicates that only a small proportion of rental properties in a specific area are unoccupied. In such a scenario, only 2 out of every 100 rental units are vacant.
This low vacancy rate suggests a tight rental market, characterized by high demand for rental properties and limited supply. Renters in areas with a 2% vacancy rate may face increased competition for available units, often leading to higher rental prices.
On the other hand, real estate investors may benefit from a low vacancy rate, as it generally results in reduced vacancy periods, stable income, and the potential for rental growth.