Why It Matters
Here is what physical vacancy tells you: divide your vacant units by total units and multiply by 100. A 40-unit building with 4 empty units has a 10% physical vacancy rate. That number benchmarks directly against the market. National averages for stabilized multifamily typically run 5–7%. If your property exceeds that, either rents are above market, management is slow on turns, or your proforma projections were optimistic. Physical vacancy is the first number every lender, broker, and underwriter checks — and it shows up in every trailing-12-months rent roll.
At a Glance
- What it is: The percentage of total rentable units that are completely unoccupied at a given point
- Formula: Physical Vacancy Rate = (Vacant Units / Total Units) × 100
- Typical benchmark: 5–7% for stabilized multifamily in most U.S. markets
- What it excludes: Concessions, delinquent tenants, and below-market rents — those fall under economic vacancy
- Why lenders care: Agency lenders and DSCR models use physical occupancy to stress-test cash flow projections
Physical Vacancy Rate = (Vacant Units / Total Units) × 100
How It Works
The count, not the dollars. Physical vacancy tracks units — not rent dollars. A building where 3 units are empty has a physical vacancy of 3, regardless of what those units rent for. This is intentional. The metric isolates the supply-demand signal from pricing or collection problems. You fix physical vacancy with leasing; you fix economic vacancy with pricing and tenant screening.
Point-in-time vs. rolling rate. A snapshot vacancy rate tells you what is empty today. A rolling rate averages vacancies over a period — usually 12 months via the trailing-12-months rent roll. Rolling is more useful for underwriting because it smooths out turn cycles. A 4-unit building losing one unit each quarter averages 6.25% rolling vacancy even if the current snapshot is 0%.
Physical vs. economic vacancy. Physical vacancy counts empty units. Economic vacancy counts all lost revenue — including units rented at concession prices, tenants who are delinquent, and any units pulled offline for renovation. A residential-vs-commercial distinction matters here: commercial leases often include free-rent periods that create economic vacancy without physical vacancy. For residential multifamily, the gap between physical and economic vacancy is usually small; in commercial, the gap can be enormous.
How unit-count affects the math. In a 4-unit building, one empty unit is 25% physical vacancy — catastrophic for cash flow. In a 100-unit complex, one empty unit is 1%. Scale changes the volatility of the metric. Smaller unit-count properties require tighter vacancy management because each unit swing moves the rate significantly.
Agency underwriting and physical occupancy. Agency debt — Fannie Mae and Freddie Mac multifamily loans — typically requires minimum physical occupancy of 90% (10% vacancy or less) at origination. Properties with higher vacancy may still qualify but require seasoning periods, escrow reserves, or a value-add loan structure. This constraint shapes how investors approach turnaround deals.
Real-World Example
Aaliyah was underwriting a 24-unit apartment complex in Memphis. The broker's proforma showed 95% occupancy and strong pro forma NOI. Before she trusted those numbers, she pulled the actual rent roll.
Five units were vacant. Two had been empty for over 60 days. Physical vacancy: 5 / 24 = 20.8%.
That was not a 5% vacancy story. At market rent of $850 per unit, five empty units represented $4,250 per month in lost gross revenue — $51,000 annualized. Against the broker's stated NOI of $112,000, the real cash flow was closer to $61,000 after adjusting vacancy to what the rent roll actually showed.
The listing agent explained that the owner "had been selective with tenants." Aaliyah reran the deal at 15% stabilized vacancy for the first year and 8% thereafter. The numbers still worked — but only at $180,000 below asking price. She submitted that offer. The seller countered, and they settled $130,000 below the original list. Physical vacancy told her what the proforma did not.
Pros & Cons
- Simple to verify — count empty units from the rent roll, no estimation required
- Directly comparable to market benchmarks and lender thresholds
- Identifies leasing or management problems that financial metrics can obscure
- Drives NOI sensitivity analysis — one unit swing in a small building changes the whole deal
- Snapshot reading can be misleading — low vacancy on closing day may not reflect the trailing trend
- Does not capture revenue lost to concessions, delinquency, or below-market rents
- A fully occupied building with high delinquency looks fine on physical vacancy but cash flows poorly
- Does not differentiate between units vacant due to renovation versus poor demand
Watch Out
Turn time inflates vacancy. In a high-turnover property, units cycle through 2–4 week vacancy periods between tenants. A building with excellent demand can still run 8–10% physical vacancy if management is slow to turn units. Always ask how many days-on-market the last 5 renewals averaged — fast lease-up signals strong demand despite temporary vacancy.
The proforma vacancy assumption. Sellers routinely present proformas with 5% vacancy regardless of actual history. Pull the trailing-12-months rent roll and calculate the real rolling vacancy before accepting any underwriting assumption. The difference between a seller's 5% and your calculated 15% can eliminate positive cash flow entirely.
Single-digit unit counts. In properties with fewer than 10 units, physical vacancy can swing wildly from a single tenant event. A 4-unit building where one long-term tenant leaves goes from 0% to 25% in a day. Benchmark against rolling 12-month averages, not point-in-time snapshots, and stress-test down to 50% occupancy for small portfolios.
Lender occupancy timing. Lenders check physical occupancy at underwriting AND at loan closing, typically 30–60 days apart. A property that passes underwriting and then loses a tenant before closing can trip the minimum occupancy covenant. Track vacancy weekly during the due diligence and closing period.
Ask an Investor
The Takeaway
Physical vacancy is the most direct measure of whether your property is actually leased. It does not tell the whole revenue story — that requires economic vacancy analysis — but it is the first filter every underwriter applies and the metric that drives your NOI more than any other single variable. Know your property's rolling 12-month physical vacancy, compare it to the local market, and stress-test every acquisition at higher vacancy than the broker's proforma assumes. The deal that works at 5% vacancy but breaks at 12% is not a deal — it is a bet.