Office Vacancy RateVt = VSt/ St Where VSt is the vacant office space at time t and St is the total office space stock at time t. A grey area in the calculation of the office vacancy rate is office space available for subleasing. This is space that is actually under lease contract but the company renting it decides to put it in the market for sub-leasing, usually because it is not being used. In case that we have data only on the total occupied office space (OSoffice) in a market then the vacancy rate can be calculated as follows: Voffice = (Soffice – OSoffice/Soffice)
The office vacancy rate is a good indicator of market strength, as it is a composite measure that includes both the demand side and the supply side. The demand side is counted actually by the vacant stock which in essence is the stock that is not effectively in demand. Thus, in some sense it represents excess supply, at least at the time of analysis.
The above statement though, is not exactly valid because some vacant stock is needed at any given point in time in order to allow for the search processes of tenants looking for space and landlords looking for tenants. This required vacancy rate for normal market operations, is referred to in the literature as normal or structural vacancy rate and has been paralleled by analysts with the frictional unemployment rate. Taking into account the concept of the structural vacancy rate then, the true excess supply in a market is the vacancy rate that is in excess of the normal or structural vacancy rate. Empirical studies have presented evidence suggesting that the structural vacancy rate may vary through time and across metropolitan office markets due to varying conditions of market strength and their effects on landlord and tenant search processes. If this is true, then the simple comparison of nominal vacancy rates across office markets may not accurately reflect differences in excess supply, or strength of the market. The accurate estimation of structural office vacancy rates, however, requires long historical data and econometric modeling and analysis. Thus, practically, it is very difficult to carry out and the estimates can always be questioned as to how accurate they are. So putting aside the complicated and difficult to apply on actual vacancy data concept of the structural vacancy rate, the nominal vacancy rate can be used as a reasonable approximation of the strength of the market having always in mind that each market may have its own peculiarities and idiosyncrasies that may justify a lower or higher normal vacancy rate without meaning that it is a more or less oversupplied market.
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