Vacancy Loss: How to Actually Calculate It Correctly

Key Takeaways

Physical vacancy counts only empty units. Economic vacancy, the number lenders actually underwrite to, also counts occupied units earning below market, sitting under concession, or not paying rent at all.
The economic vacancy formula is (gross potential rent minus actual rental income) divided by gross potential rent, which captures concessions and bad debt that a physical count ignores entirely.
Most DSCR lenders apply a 5% to 10% vacancy floor plus 1% to 3% credit loss during underwriting, regardless of how full the property actually is on the application date.
When economic occupancy sits more than 5 percentage points below physical occupancy, that gap is a red flag for concessions, bad debt, or non-revenue units the physical count never caught.
A property at 98% physical occupancy can still be underwritten at 90% to 95% effective occupancy, and that difference lands directly on net operating income and debt service coverage.

A building sits at 98% physical occupancy. Every hallway light is on, the parking lot is full, and the internal spreadsheet shows a stabilized property. Then a lender's underwriting model reads that same property at 90% to 95% effective occupancy and starts trimming income that seemed already accounted for. The gap isn't an error. It's the entire point of the calculation most owners skip, because the easy vacancy number, the empty units, is not the number that decides whether a deal survives underwriting.

Numetix takes an expert-led, AI-powered, and human-in-the-loop approach to vacancy reporting, calculating economic vacancy alongside the physical count so owner projections match what a lender will actually underwrite to. This guide covers both formulas and where they diverge.

Quick Answer: What is vacancy loss and how is it calculated?

Vacancy loss is rental income lost from unoccupied space, and the term can also refer to potential rent a property could earn in the future. The simple physical version multiplies gross scheduled income by the vacancy rate.
That physical count misses income lost to concessions, below-market rent, and unpaid rent from units that are technically occupied. Economic vacancy captures all of it: (gross potential rent minus actual rental income) divided by gross potential rent.
Lenders underwrite to economic vacancy, not physical, because an occupied but non-paying unit is treated exactly like a vacant one for debt-service purposes.

Start with physical vacancy, then see where it falls short

Physical vacancy loss has two mechanical forms. At the portfolio level, multiply gross scheduled income, total potential rent at 100% occupancy, by the vacancy rate, which is one minus the occupancy rate. At the unit level, multiply monthly rent by the number of months the specific unit sits empty. Both versions count the same underlying thing: doors with no tenant behind them. A healthy physical vacancy rate typically runs 5% to 10%, though this swings meaningfully by region and market; the national rental vacancy rate has been cited around 6.9% recently, meaning the average owner is missing close to 7% of potential rent using the physical measure alone.

The blind spot is straightforward to state: this formula only counts empty units. A property with zero vacant units returns zero physical vacancy loss, even if half the residents are paying under market rate or a promotion gave away the first two months free. That's exactly where the second number takes over.

Economic vacancy is the number that actually reflects lost income

Economic vacancy is the gap between a property's gross potential rent and its actual rental income, expressed as a percentage. Gross potential rent is the total income if every unit leased at full capacity with zero credit loss. The formula: (gross potential rent minus actual rental income) divided by gross potential rent. Because it starts from full potential and subtracts what was actually collected, it captures every leak a physical count skips entirely: occupied units generating no rent (a property manager's own unit, a promotional concession giving away free weeks or months), rent lost to below-market leases, and credit losses from tenants who stop paying. In a standard proforma, economic vacancy, 100% minus economic occupancy, folds physical vacancy, concessions, and bad debt into one figure, though some underwriters break these into separate line items for more granular analysis.

Why lenders underwrite to economic vacancy, with floors regardless of current occupancy

Lenders underwrite to economic occupancy because it reflects the income actually available to service debt; an occupied but non-paying unit is treated exactly like a vacant one for debt-service purposes. Most DSCR lenders assume a vacancy rate of 5% to 10% of gross rental income at underwriting, regardless of the actual occupancy shown on the application date, then add 1% to 3% credit loss for tenants who don't pay, which is how a property at 98% occupancy can still be underwritten at 90% to 95% effective occupancy. This floor is not a judgment about a specific building; it's a standing underwriting policy.

The paper trail confirms this practice at scale. An SEC-filed due-diligence report from 2019 documents a lender's master credit policy setting a guideline minimum vacancy of 5%, with any loan underwritten below 3% requiring a formal exception waiver. A 2024 CMBS prospectus disclosed one apartment loan where DSCR was calculated on an as-stabilized 4.5% vacancy assumption while actual economic vacancy sat at 14.9%, an exception that came paired with a $450,000 rent reserve requirement.

Measure	What it captures	What it misses
Physical vacancy	Fully empty units only	Concessions, below-market rent, unpaid rent
Economic vacancy	All income shortfall vs gross potential rent	Nothing; this is the comprehensive measure

The gap between the two numbers is the red flag to watch

A spread where economic occupancy sits more than 5 percentage points below physical occupancy is a specific red flag, signaling heavy concessions, significant bad debt, or a meaningful number of non-revenue units, exactly the leaks a physical count cannot see. Finding that gap means finding income leaving the building without an empty unit to explain it. The consequence runs straight to the bottom line: lower effective income reduces NOI, which reduces the debt-service coverage ratio, and most commercial lenders require a minimum DSCR of 1.20x to 1.25x for stabilized loans, with multifamily assets of five or more units falling in that same band. Underwriting models are commonly run with a 5% to 10% simulated drop in NOI to stress-test rollover or softening rents; if DSCR falls below policy minimums under that stress, the loan gets downsized or restructured more conservatively.

Three things to calculate before trusting the next proforma

Compute economic vacancy alongside physical: run the full formula next to the simple physical count. If economic occupancy sits more than 5 points below physical, find the concessions, bad debt, or non-revenue units driving the gap before finalizing anything.
Apply a lender-style floor to stress-test the deal: re-underwrite at 5% to 10% physical vacancy plus 1% to 3% credit loss, the same floors a DSCR lender applies, and watch what happens to NOI and coverage.
Reconcile in-place against stabilized assumptions: underwritten NOI blends current and future expectations, which drives both DSCR and covenant compliance, so build vacancy loss estimates using explicit assumptions about market conditions, property condition, and lease expirations, not just today's snapshot.

Frequently asked questions

What is the formula for vacancy loss?

The physical vacancy loss formula multiplies gross scheduled income by the vacancy rate (one minus the occupancy rate). The economic vacancy formula, the more complete measure, is (gross potential rent minus actual rental income) divided by gross potential rent. Both are useful; the economic version is the one lenders and sophisticated owners actually rely on for underwriting decisions.

Why would a fully occupied property still show vacancy loss?

Because physical occupancy only measures whether a unit has a tenant in it, not whether that tenant is paying full market rent or paying at all. A building at 100% physical occupancy can still show meaningful economic vacancy loss if units are under concession, rented below market, or carrying unpaid balances that haven't been formally written off. This is precisely the scenario that surprises owners when a lender's underwriting comes back lower than expected.

How often should economic vacancy be recalculated?

Monthly, as part of the standard financial close, rather than only when preparing for a refinance or sale. Tracking it monthly makes the 5-point gap threshold meaningful as an ongoing monitoring tool, catching a growing concession or bad debt problem early, rather than discovering it all at once during a lender's underwriting review when it's harder to explain or correct.

For property management firms that want owner reporting to match what a lender will actually underwrite to, our accounting services calculate economic vacancy alongside physical occupancy as part of the standard monthly close, expert-led, AI-powered, and human-in-the-loop.

See the complete guide to property management accounting for the full financial reporting framework.