A critical characteristic that indicates the condition of the market area is the equilibrium vacancy rate. Equilibrium vacancy rate is also called natural vacancy rate, optimal vacancy rate, or normal vacancy rate. Equilibrium vacancy rate is comprised of frictional vacancy rate and lag vacancy rate. Frictional vacancy may be described as space needed to service normal tenant movements within a market area. Frictional vacancy rate is a theoretical construct and it cannot be calculated. In the real estate industry, the standard for frictional vacancy rate is assumed to be 5%. Lag vacancy rate may be described as vacant space reserved for new demand coming into the market area. It considers current demand as well as the time required to develop additional space for the forecasted new demand coming into the market area. Like frictional vacancy, lag vacancy rate is a theoretical construct and it cannot be calculated.

According to Stephen F. Fanning, market equilibrium vacancy is:

The point in time when supply and demand are equal, with the only vacant space being the space being the space needed to service the market friction of normal tenant movements and space needed to accommodate new demand coming into the market.  (See Stephen F. Fanning, Market Analysis for Real Estate, 2nd ed. (Chicago: Appraisal Institute, 2014), 185.)

An alternate definition of equilibrium vacancy rate by Richard L. Parli and Norman G. Miller is:

The balance of space where supply of a property type exceeds demand by an amount of space that produces stable rents. (See Richard L. Parli and Norman G. Miller, “Market Equilibrium Analysis,” The Appraisal Journal, (Fall 2017); 307-316.)

At the equilibrium vacancy rate, there is no upward or downward pressure on real rental rates.  A measure of the market equilibrium vacancy rate is an average of vacancy rates over a long-term.  A long- term, would be long enough, to capture cyclicality of a real estate market and rental growth in the same real estate market. Fanning, on page 161 of his book, stated that: … the best estimate is based on the long-term average vacancy with “long-term” to include multiple market cycles (i.e., an average of 20 to 30 years or more). At the equilibrium long term vacancy rate, rents will change direction. When actual vacancy rate is above the equilibrium vacancy rate, rents will decrease and when actual vacancy rate is below equilibrium vacancy rate, rents will increase. Knowledge of how far away current real rent is from equilibrium rate and the direction would be invaluable to forecast cash flows. When rents are increasing and cross the equilibrium vacancy rate, together with a current vacancy rate below equilibrium vacancy rate, new developments may not be financially feasible until market rent is at least equal to or exceeds feasibility rent.

The following four tables present information on some of the real estate submarkets of the Dallas-Fort Worth Metropolitan Statistical Area. The tables show data on four property types: industrial, multi-family, office, and retail. The information is useful to inform real estate acquisition and leasing decision making. When working with our clients, we provide market analysis at the property subtype level and at a narrowly defined area within a submarket.