Real Estate Market Analysis
1. The current vacancy rate, that is, the percent of the total stock of properties competing with the property under consideration that is vacant. The vacancy rate is the best indicator of the health of the local real estate market. A high vacancy rate is an indication that there is considerable excess supply which will likely lead to declining rents and property values. On the contrary a very low vacancy rate is an indication of excess demand, which should create upward pressures in rental rates. 2. However, the vacancy rate prevailing in the local real estate market at the time of the analysis is not enough to evaluate the prospects of a property investment that will be held for at least a few years before it is sold. In such a case, we need to also quantify the future additional demand and new supply that will enter the local real estate market during the planned holding period of the property, in order to assess how the vacancy rate will move from its current levels, and the impact of such movements on rents and, therefore, on the property’s income earning capacity and, ultimately, its value. For example, consider that we are assessing the local apartment market and our analysis indicates the following estimates for the increase in demand (based on projections of increases in the number of households in age group 25-29 and 30-35), new completions (based on apartment projects under construction and permits that have been issued but have not yet started) and the current vacancy rate. Based on these estimates, we can calculate how the vacancy rate will move in the years ahead, as presented in the table below.
where: The vacancy rate for each year has been calculated as the ratio of the vacant stock in period over the total stock in each period: Vacancy Rate (t) = Vacant Stock (t) / Total Stock (t)
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