The normal or structural vacancy rate is the rate at which the market is in equilibrium. This may seem counterintuitive because any amount of vacant stock could be interpreted as excess supply. Since it is unoccupied, there is no demand for it. However, this is not the case in practice, and it has been empirically proven that a minimum vacancy rate is required for a real estate market to function normally.
The nominal vacancy rate is the percentage of properties in market that are vacant, over and above the structural vacancy rate.
The fundamental premise is that both landlords’ and tenants’ search processes for suitable properties are lengthy and cannot be completed correctly if there is no vacant stock in the market at any given moment.
One can analyze the state of the market (excess demand or surplus supply) and whether rents should be rising or falling by comparing the nominal vacancy rate (V) that prevails in a market with its structural or equilibrium vacancy rate (V*).
The following dynamics should occur in theory: if the nominal vacancy rate is higher than the structural (equilibrium) vacancy rate, the market is oversupplied and there is surplus vacant stock. Decreased rents should be predicted in such situations.
If the current vacancy rate in the market is lower than the equilibrium vacancy rate, it indicates that there is a shortage of assets and that the market is undersupplied. As a result, higher rents should be predicted.
