Vacancy risk

Vacancy Risk - Vacancy risk refers to the danger that a property intended for rental will temporarily fail to find a tenant, causing the owner to lose rental income while ongoing management costs continue to accrue. It is one of the key income risks associated with real estate investments.

Influencing Factors and Economic Impact

Vacancy risk is determined by several factors that landlords should consider when making investment decisions and managing properties. Location is the most significant factor: Properties in economically strong regions with high demand have a significantly lower vacancy risk than properties in structurally weak areas with declining populations. The condition and amenities of the property also play a significant role. Modernized apartments with up-to-date heating, good insulation, and an appealing floor plan can be rented out more quickly than properties in need of renovation.

The asking rent directly influences vacancy risk. If the rent demanded is significantly above the local market rate, the time required to find a tenant increases considerably. The type of property is also relevant: small to medium-sized apartments with two to three rooms are in higher demand in most markets than very large or very small units.

The economic consequences of a vacancy go beyond the mere loss of rent. Property taxes, building insurance, condominium fees for owner-occupied units, loan payments, and pro-rated operating costs continue to accrue unchanged. In the case of prolonged vacancy, a loss in value may also occur, as a property that remains vacant for an extended period appears problematic to potential buyers or tenants.

In real estate valuation, the vacancy risk is factored in as a calculated discount. In income-based valuation methods, appraisers typically apply a vacancy rate of two to four percent of the annual rent, depending on the location and quality of the property. In markets with very high demand, this figure may be lower; in weaker submarkets, it may be significantly higher.

Structural vs. Turnover-Related Vacancy

In technical terminology, a distinction is made between two types of vacancy:

Turnover-related vacancy occurs during a normal tenant change: the old tenant moves out, and the new one has not yet moved in. This vacancy is unavoidable and, with professional marketing, lasts only a few weeks. It is the standard calculation used in determining the income value.

Structural vacancy occurs when a property cannot find tenants over an extended period-due to lack of demand, excessive rent, poor condition, or an unfavorable location. Structural vacancy is a warning sign: It indicates a fundamental misinvestment or a need for action on the part of the owner. In shrinking regions, structural vacancy can be permanent and reduce the market value of the property to the level of the land value.

Strategies for Reducing Vacancy Risk

Landlords can specifically reduce vacancy risk through various measures. Market-based rent pricing, based on current rent indices and comparable listings, noticeably shortens the time it takes to find a tenant. Regular maintenance and modernizations tailored to needs keep the property competitive. Professional tenant management with timely re-leasing even during the previous tenant’s notice period minimizes vacancy periods. For investors seeking maximum planning security, rent guarantees are an option, whereby the developer or a master tenant guarantees rent payments for a defined period-though their value is always tied to the guarantor’s creditworthiness.

Practical Tip for Nuremberg and the Metropolitan Region

The Nuremberg metropolitan region is one of Bavaria’s housing markets with strong demand and a comparatively low vacancy rate. Particularly in the core cities of Nuremberg, Fürth, and Erlangen, the structural vacancy rate is below three percent. Nevertheless, there are differences: While locations near the University of Erlangen-Nuremberg, in Nuremberg’s Old Town, or in Fürth-Südstadt have virtually no vacancies, marketing can take longer in outlying areas or for properties in need of renovation in Nuremberg-Langwasser, Schwabach, or small surrounding municipalities.

For commercial real estate, the vacancy risk in the Nuremberg metropolitan region is currently elevated for downtown office space, as remote work and flexible work models have reduced demand for traditional office space. Anyone buying or holding commercial real estate should therefore factor in the vacancy risk with particular caution. We recommend that owners plan for at least one month of vacancy per year in their calculations and adjust their reserves accordingly. We would be happy to conduct a location-specific vacancy risk analysis for your property.

Frequently Asked Questions About Vacancy Risk

What should the imputed vacancy rate be set at?

In practice, investors typically factor in an imputed vacancy rate of two to four percent of the annual gross rent. In highly sought-after locations within the Nuremberg metropolitan area, a rate of two percent may be sufficient, while for properties in less sought-after submarkets or with a limited target audience, three to five percent is more realistic. For commercial real estate, the rates are generally higher than for residential real estate-often five to ten percent, depending on the market segment and lease term.

What is a rent guarantee and how does it protect against vacancy?

A rent guarantee is a contractual commitment by a third party-usually the developer or a master lessor-to pay the rent for a specified period regardless of actual occupancy. It offers planning security but carries risks: The guarantee is only as reliable as the guarantor’s creditworthiness. In addition, the guarantee costs are often factored into the purchase price, meaning the investor ultimately finances them themselves. Once the guarantee period expires, the vacancy risk becomes fully exposed.

What are the tax implications of a vacancy?

If a property stands vacant through no fault of the owner and the owner can provide verifiable evidence of an intention to rent it out, the income-related expenses remain tax-deductible. These include loan interest, depreciation, property tax, and maintenance costs. It is crucial that the owner documents active efforts to rent out the property, such as through advertisements, real estate agent contracts, or proof of viewings. Without this proof, the tax office may disallow the income-related expenses. The burden of proof for the intention to rent lies with the owner.

How can I determine before purchasing whether a property is at risk of vacancy?

Key indicators include: the property’s rental history (were there frequent tenant turnover or periods of vacancy?), location and micro-location (public transportation access, local amenities), standard of amenities, the ratio of the asking rent to the local rent index, and regional population growth. For our buyer clients, we assess a property’s rentability based on these criteria before purchase and provide a realistic assessment of the vacancy risk.

Back to the Real Estate Glossary.