If you want to know the value of a property, if you want to know whether it's competitive in your marketplace, then one important index to consider is its vacancy factor.

When looking at apartments many appraisers automatically assume a 5 percent vacancy factor, a percentage which changes with local supply and demand. If there's overbuilding then occupancy rates go down and it becomes difficult to raise monthly rentals. If the local population expands faster than the number of units required to provide housing, then there's more competition for units, the occupancy rate goes up, and higher rents become possible.

Most local markets have vacancy rates which change over time. Over the last 10 years in the Portland marketplace, as an example, we have seen vacancy rates rise and fall. When we analyzed rents over a 10-year period we found that vacancy rates averaged 5 percent during the study period, thus suggesting that appraisers are generally right to use a 5-percent vacancy factor when valuing properties.

To keep vacancy levels low, our property managers watch turnover rates with great care. Every week they compare our rates to the market, set a goal to beat the rate, and also try to re-let properties as quickly as possible.

With properties that have on-site managers, properties can usually be ready for a new tenant in a week after the last tenant has moved out. Houses take a little longer.

Part of the turnover process involves getting the unit ready in terms of cleaning and painting, but another important element concerns getting the right market rent. Our on-site managers survey the competition every quarter to see if we're missing the market and we adjust our rental rates regularly.

If the market is strong, we increase the rents with every turn. If the market is soft we keep the rents the same. In very competitive markets, we will give concessions to attract a tenant. This ends up being factored into a budget as a promotional expense.

Location also drives the vacancy rates of rental units. Drive-by traffic generates many rental leads while the hard-to-find property takes longer to rent and therefore is in a less desirable location from a re-let standpoint. Is the property easy to find? Is it close to schools, shopping, bus lines and major traffic arteries? Is it close to a tenant's work? Prospective tenants will consider such issues, and therefore such questions impact vacancy rates.

Property condition greatly impacts vacancy rates. Middle- and lower-end units need to be well-maintained or tenants will move to properties with better, more responsive management or newer units. Tenants move mostly because of life changes i.e. new job, divorce, the addition of children, the purchase of a home, the desire for a nicer or newer living environment, etc. In response, your units must be clean, safe and feel like home. If these conditions do not exist your rate of vacancy will increase.

Leases can stretch the length of time a tenant will stay with you. Six-month, nine-month and one-year leases are not uncommon -- and two-year are possible in certain local markets. If you have a great on-site manager the vacancy rate can be managed down to 2 percent.

Upper-end units in particular can benefit from long term leases. Such units face ferocious competition from homes, especially when interest rates fall. Twenty-five percent of our tenants move out and buy houses.

We tell all clients with an interest in purchasing investment property that they must study the vacancy rate. We suggest they examine the rental agreements for the previous two years. How long did it take to rent units? How long did tenants stay? Did the rents increase as the units turned? Were concessions needed? Are there concessions in place that will affect cash flow when the new owner manages the property?

An apartment's vacancy rate is the heartbeat of a property. If it's high, it makes it difficult for a property to be successful. When it's low, the property will make money for the owner. The rate changes frequently and depends on the local supply and demand of units. A property owner cannot assume that their apartment complex will be successful because it has been in the past. New apartments are built every year and they compete with existing units, thus owners must renovate and maintain properties to assure long-term investment success.

For more articles by Clifford Hockley, please press here.

Published: February 7, 2001

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Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon. Mr. Hockley holds an MBA Willamette University and a B.S. in Political Science from Claremont McKenna College. He is a Certified Property Manager and Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Mr.Hockley serves as member at large on the Portland IREM board. He has twice been named Certified Property Manager of the Year (2001 and 2003) by the Institute of Real Estate Management and is a frequent contributor to industry newsletters.