Why is a 5% vacancy rate often used in the income approach?
When developing a likely market rent to be used in the direct income capitalization approach, vacancy becomes a function of the assigned market rent. In other words, there is a correlation between anticipated vacancy and the assigned market rent. If the appraiser assigns a market rent at the higher end of a range of possible market rents, the assigned vacancy right should be higher. This reflects the added risk to the higher rent. If the appraiser assigns a market rent at the low end of a spectrum of possible rents, the anticipated vacancy should be lower, since there will be less risk. The routine use of a 5 percent vacancy rate in many income capitalization worksheets eliminates the vacancy variable and allows the appraiser to focus on developing a market rent based on that nominal vacancy rate. It asks the question, What would the market rent be for this property presupposing a 5 percent vacancy rate? Also, it should be noted that the pro forma vacancy rate should not be an expressi
