RENO, Nev. — Real estate market statistics are released quarterly with the new vacancy rates. Vacancy rates always move around, but should we pay attention to them?
Yes, but it’s important that you understand how the vacancy rate is derived and, most importantly, how it fits within the perspective of the market as a whole.
Here’s how the math works to create the vacancy rate. First, the market size is recalculated by adding the sizes of new construction projects now available and then decreased by the number of existing inventory repositioned for other real estate use types or demolished within the reporting period.
The occupied space is recalculated by adding the gross amount of previously unoccupied space absorbed by new tenants and decreased by the number of tenants that moved out of previously occupied space, plus vacant new construction yielding a net absorption size for that reporting period.
The new total size occupied as compared to the new total market size is the new occupancy rate. Subtract that from 100 percent, and you get the new vacancy rate.
The vacancy rate is simply a number, so it’s important to understand how to derive useful information from it. In our company quarterly report, we use a chart with an arrow to put real world relevance into these raw vacancy numbers.
Our range runs from 3 percent to 15 percent. Our area has experienced vacancy rates as low as 4.5 percent and as high as 13 percent. As with any open economy, the laws of supply and demand dictate the terms of the transaction.
Accurate vacancy rates are important to know because they tend to indicate who has the better negotiating leverage at the time — landlord or tenant. Just as important, however, is knowing the market velocity, which tracks the amount of new interest in the area shown by property tours and incoming inquiries, as this can also factor into how the parties negotiate.
It’s important to understand that some large new individual properties can move the vacancy needle based on their size relative to the market, whereas the activity on smaller properties does not.
User-occupied, built-to-suit projects have almost zero impact on vacancy. Recent examples are Switch, Tesla, Panasonic and Apple, as they are occupied as soon as they are completed, so no vacancy is created.
As a side note, these highly specialized-use properties will not find new occupants anytime soon if they are vacated. A good example of this is the long vacant K-Mart distribution warehouse on McCarran in Sparks. This was a specialized 1,500,000-square-foot warehouse built to K-Mart’s exact business model at the time.
Logistics evolved, making the property effectively obsolete by the time K-Mart moved out. Currently, a large infusion of capital will remodel it into a usable class B warehouse, which will add significant vacancy in the second quarter of 2019.
When the former K-Mart warehouse comes back into available inventory and the vacancy increases by 1.5 percent (a huge quarterly jump), will that impact the overall market? Not really. But a myopic view of the new vacancy rate would falsely indicate a far less landlord-friendly market than before and a market tending toward balance (+- 8 percent), which is simply not the case.
As another example, when a new speculative 650,000-square-foot warehouse comes on line and the vacancy rate changes by three-quarters of 1 percent, again, does this really impact the landlord/tenant leverage on the transaction you are working on? Likely not, unless you are looking for a 650,000-square-foot warehouse and now you have another to choose from rather than just one option.
In summary, yes, it’s good to know an overall market’s vacancy rate, as it will likely impact your transaction to some degree. However, the amount of availability for the exact size location you are seeking can vary dramatically, from almost no availability to abundant availability.
Overall vacancy rates could also stay relatively constant, while availability in your size range can change significantly. To find the amount of available vacancy that exists for your particular size need, you need the assistance of a qualified real estate professional who specializes in the type of commercial real estate you are looking to buy or lease.
The true measure of a vacancy rate is how much choice exists for me in the product type and size I’m needing. Your real estate professional can provide these answers.
Tom Miller, CCIM, is the president of Miller Industrial Properties, Northern Nevada’s longest-running industrial real estate brokerage firm. Visit millerindustrialproperties.com to learn more.
