12.2 Occupancy and Vacancy Analysis

From Full Potential to Collectible Income

Potential gross income assumes a fully productive rent roll under the chosen rent premise. Real properties experience vacant units, downtime between tenants, concessions, and bad debt. ECO VI.b Occupancy/vacancy analysis is the bridge from PGI to effective gross income (EGI).

Core identity (memorize):

EGI = PGI − Vacancy and collection loss
(Other income is either included in PGI or added in the EGI step—be consistent with the stem’s format.)

Without a supportable vacancy/collection allowance, direct capitalization overstates income and value. Without understanding stabilized vs actual occupancy, you will mis-apply a one-year rent roll to a long-run cap rate.

Occupancy Basics

Physical vacancy answers: How much space is empty?
Economic vacancy answers: How much of the potential income are we not earning?

Physical vs Economic Vacancy — Worked Contrast

Property: 40 identical units; market rent $1,000/month each.
PGI annual = 40 × $1,000 × 12 = $480,000.

Facts this year:

• 2 units vacant all year → physical vacancy = 2/40 = 5%
• 38 units occupied, but 4 occupied units received 1 month free rent (concession)
• No other collection issues

Physical vacancy loss ≈ 5% × $480,000 = $24,000
Concession loss = 4 × $1,000 = $4,000
Total income loss vs full potential ≈ $28,000
Economic vacancy rate ≈ $28,000 ÷ $480,000 = 5.83% (not 5%)

Exam tip: If a stem gives physical vacancy only, use it unless concessions/delinquency are also described. If the stem gives loss-to-lease, free rent, or delinquency, economic vacancy is higher than pure empty-unit vacancy.

Collection Loss

Collection loss (bad debt / credit loss) is the portion of rent billed to occupied tenants that is never collected—nonpayment, partial payment, or write-offs after vacancy moves-outs with unpaid balances.

On many exams and in many reconstructed statements, vacancy and collection are combined:

Vacancy and collection allowance = x% of PGI
Dollar V&C = PGI × vacancy & collection rate

Example: PGI $480,000; combined V&C 6% → allowance = $28,800; EGI = $451,200 (before separating other income if needed).

Sometimes stems split them: vacancy 5% + collection 1% = 6% total. Add them unless told they interact differently.

Market Vacancy vs Subject Vacancy

When subject vacancy ≠ market:

Exam judgment: Direct capitalization of stabilized NOI usually applies a market-supported stabilized vacancy, not blindly the owner’s last 3 months of 100% occupancy after a lucky lease-up, and not a depression-era spike if the market has normalized—unless the assignment is a current (non-stabilized) cash flow / yield problem.

Stabilized Occupancy

Stabilized occupancy is the occupancy level reasonably expected under typical competent management and normal market conditions as of the effective date’s forward-looking equilibrium—not a one-off spike or trough.

Related ideas:

• Stabilized vacancy = 1 − stabilized occupancy (approximately, in simple models)
• Lease-up period — time for a new or renovated property to reach stabilization; often modeled in yield capitalization / DCF, not stuffed into a single stabilized cap rate without disclosure
• Stabilized NOI — NOI at stabilized occupancy and normalized expenses

Residential exam note: Even though Income is only ~4.5% on Licensed Residential, vacancy/EGI arithmetic still appears. CG candidates must treat stabilization as a valuation premise, not a slogan.

How Vacancy Rates Affect EGI (and NOI)

Because V&C is deducted before operating expenses:

Δ EGI ≈ −(change in V&C rate) × PGI
(Exact if other income is inside PGI and rate applies to that base.)

Operating expenses that are fixed do not fall when vacancy rises; variable expenses may fall. Therefore a higher vacancy rate usually cuts NOI by at least the EGI reduction, and sometimes more if expenses do not decline proportionally.

Worked Example 1 — Straight V&C on PGI

PGI: $600,000
Vacancy & collection: 7%
V&C dollars: $600,000 × 0.07 = $42,000
EGI: $600,000 − $42,000 = $558,000

If OE = $220,000:
NOI = $558,000 − $220,000 = $338,000

Worked Example 2 — Sensitivity of EGI to Vacancy

Same PGI $600,000; OE fixed at $220,000 for simplicity.

Moving from 5% to 10% vacancy destroys $30,000 of NOI here—same as the extra V&C—because OE was held fixed. At a 8% cap rate, that is $375,000 of value ($30,000 ÷ 0.08).

Worked Example 3 — Vacancy on Rent Only; Other Income Separate

Some statements apply vacancy only to rental PGI, not to certain other income:

If the stem applies 6% to total PGI including laundry, other income is also haircut—follow the stem.

Worked Example 4 — Subject vs Market Stabilization

PGI at market rents: $800,000
Current subject vacancy: 12% (lease-up after renovation; 4 months left to stabilize)
Market stabilized vacancy: 6%
Assignment: market value by direct capitalization of stabilized NOI

Stabilized V&C = 6% × $800,000 = $48,000
Stabilized EGI = $752,000

Using 12% would understate stabilized EGI by another $48,000 and is wrong for stabilized direct cap unless the stem asks for a non-stabilized current year. (Lease-up risk might still show up in a higher cap rate or a separate DCF—Chapter 13.)

Worked Example 5 — Physical Units to Dollar Vacancy

100-unit project; average market rent $1,250/month
PGI = 100 × $1,250 × 12 = $1,500,000
Typical vacant units (stabilized): 5 units
Physical vacancy = 5%
Plus collection loss 1% of PGI = $15,000

Vacancy dollars ≈ 0.05 × $1,500,000 = $75,000
Total V&C = $75,000 + $15,000 = $90,000 (6% combined)
EGI = $1,500,000 − $90,000 = $1,410,000

Occupancy Analysis Evidence (What Supports the Rate)

Exam stems may cite:

• Competitive property vacancy surveys
• Broker or management interviews
• Historical subject vacancy (normalized)
• Absorption and new supply pipeline
• Seasonality (resorts, student housing)

Student housing / hospitality may show seasonal occupancy; stabilization might use an annual average occupancy, not peak August or trough December alone.

Link to Reimbursements and Expense Gross-Up

At low occupancy, expense reimbursements may fall if based on occupied SF, while some fixed expenses continue. Stabilized statements often assume:

• Stabilized occupancy for rent
• Stabilized recovery ratios for CAM/taxes
• Expenses at levels consistent with that occupancy (or grossed-up per lease terms)

Inconsistency—full reimbursements with 25% vacancy—can be an exam red flag in reconstruction problems.

Common Exam Traps — Occupancy/Vacancy

• Using 100% occupancy forever because the property is full this month
• Confusing physical vacancy with economic vacancy when concessions exist
• Applying vacancy after expenses (wrong order—V&C comes from PGI to get EGI, then OE)
• Double-counting: reducing unit count in PGI and applying a vacancy rate
• Applying a retail market vacancy to a long-term single-tenant NNN without reading the lease risk (credit/void risk may appear as a rate or vacancy substitute—stem-specific)
• Treating lease-up vacancy as stabilized for a new project in a direct cap problem without adjustment

Formula Card

1. Occupancy % ≈ occupied units ÷ total units
2. Vacancy % ≈ 1 − occupancy % (physical)
3. V&C $ = PGI × vacancy & collection rate
4. EGI = PGI − V&C $ (+ other income if not in PGI)
5. Stabilized inputs for direct cap unless the problem is explicitly current/year-one only

Bridge

You can now move from rent and reimbursement potential to EGI. Section 12.3 classifies operating expenses—fixed, variable, and replacement allowances—and identifies items that are not operating expenses. Section 12.4 assembles the full reconstructed operating statement and drills the exam’s favorite arithmetic path to NOI.