Economic Vacancy
The total rental income lost from all causes — physical vacancy plus concessions, non-paying tenants, below-market leases, and bad debt — expressed as a percentage of gross potential rent. It's usually higher than physical vacancy.
Economic vacancy measures all the rent a property fails to collect, not just the empty units. Where physical vacancy counts only units with no tenant, economic vacancy captures every dollar of gross potential rent that doesn't reach the bank — including occupied units that aren't producing full rent.
Economic Vacancy = (GPR − Actual Collected Rent) ÷ GPR
What it includes that physical vacancy misses
- Concessions — free rent, move-in specials, reduced rent to fill units.
- Loss-to-lease — occupied units leased below current market rent.
- Delinquency / bad debt — tenants in place but not paying.
- Non-revenue units — model units, employee units, or down units under repair.
- Plus ordinary physical vacancy.
A worked example
10 units, market rent $1,500 → GPR = $15,000/month
• 1 unit physically vacant: −$1,500
• 1 occupied unit not paying: −$1,500
• 2 units at $1,350 (loss-to-lease): −$300
• Concession (1 month free amortized): −$125
Total uncollected ≈ $3,425
Economic vacancy = 3,425 ÷ 15,000 ≈ 22.8%
Meanwhile physical vacancy = 1 of 10 = 10%
The building looks 90% occupied, but it's only collecting ~77% of potential rent — a 22.8% economic vacancy, more than double the physical figure.
Why lenders care
This gap is exactly where deals get oversold. A seller can show low physical vacancy while the property hemorrhages rent through concessions and delinquencies. Lenders underwrite to collected income, so a high economic vacancy directly cuts NOI, the supportable loan, and the DSCR. Tenant estoppels and the trailing rent collections are how underwriters uncover it.
How it's used in investor lending
When evaluating a multifamily deal, compute economic vacancy from actual collections, not the occupancy headline. Pull a trailing-12-month income statement and compare collected rent to GPR — the difference is your true vacancy. A wide spread between physical and economic vacancy signals operational problems (loose collections, heavy concessions) that are often a value-add opportunity if you can tighten management and burn off loss-to-lease. Always underwrite the loan on collected income; reserve the upside for your business plan, not the lender's qualifying numbers.
This is general information, not financial advice.
Frequently asked questions
What's the difference between economic and physical vacancy?
Physical vacancy counts only units with no tenant. Economic vacancy counts all uncollected rent — physical vacancy plus concessions, below-market leases, delinquent tenants, and non-revenue units. Economic vacancy is usually higher, and it's the more honest measure of how much income a property actually loses.
Why is economic vacancy important when buying a rental?
Because a property can show strong physical occupancy while collecting far less than its potential rent due to concessions, loss-to-lease, and delinquencies. Lenders underwrite on collected income, so a high economic vacancy lowers NOI, the loan amount, and DSCR. It can also flag a value-add opportunity if better management can close the gap.
How do I calculate economic vacancy?
Take gross potential rent (all units at market), subtract the rent actually collected, and divide by gross potential rent. Use a trailing-12-month income statement for the collected figure rather than the current rent roll, since it captures real-world delinquencies and concessions over time.