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Why Commercial Real Estate Vacancy Rates Matter Now More Than Ever

Updated: Mar 4

Don’t be fooled by how simple the idea of commercial real estate vacancy rates might sound.

When you were first wondering how to get into commercial real estate, vacancy rates were probably not the first thing you thought about. But as simplistic as this little topic might be, understanding (and closely monitoring) commercial real estate vacancy rates has become more imperative than ever before. 

It’s seemed to become more and more popular– people searching “how to buy commercial real estate,” and looking up commercial real estate mortgage rates, without truly knowing all of the factors that come with it.

But remember the pandemic?

That disruption completely shook up what anyone expected commercial real estate vacancy rates would have been a few months earlier.

Office spaces were left vacant due to remote work mandates, and retail outlets were quickly learning new consumer preferences.

Vacancy rates act as potent “leading indicators,” offering foresight into broader economic trends and investor sentiment.

An uptick in vacancies often signals economic downturns or shifts in consumer behavior, while declining rates may mean periods of growth and prosperity. Investors and stakeholders rely on these metrics to make informed decisions, adapting their strategies based on prevailing market conditions.

Let’s talk a little more about the effect that vacancy rates have on the market– something that isn’t the first thing people seem to think about when it comes to investing in commercial properties.

image of the exterior of a stone storefront during the day

The Impact of Vacancy Rates on the Market

High vacancy rates can decrease property values and rental rates. And suddenly, landlords can find themselves in desperate need of rental income, seeing a fast diminished return on investment as properties stay vacant.

High vacancy rates can also affect new construction projects. If property management companies struggle to fill properties, their revenue will go down, their operations will cause, and the bottom line will see a big decrease.

This can affect the entire construction industry as a whole like not having enough employment opportunities for their workers.

Historically, vacancy rates have played a pivotal role in shaping market dynamics and influencing investment strategies and asset allocation decisions.

As real estate is always a little uncertain, it’s important to always look at vacancy rates in your property’s area, state, and country as a whole.

How Vacancy Rates Are Affected

Economic Shifts

During economic downturns, businesses often face financial constraints, leading to closures, downsizing, or relocations. This ripple effect can translate into higher commercial real estate vacancy rates as office spaces, retail outlets, and industrial properties sit unoccupied amidst a shrinking tenant pool.

Commercial real estate loan rates may rise, exacerbating the challenges for businesses seeking financing and potentially deterring new ventures from entering the market.

Conversely, periods of economic growth and expansion tend to have a mitigating effect on vacancy rates.

As businesses thrive and expand their operations, the demand for commercial real estate space increases. New ventures emerge, seeking office spaces, retail storefronts, and industrial facilities to accommodate their growth trajectory. Commercial real estate financing will become more accessible, fueling development projects and stimulating market activity.

Some other economic metrics to look at when it comes to vacancy rates:

  • GDP growth

  • Unemployment rates

  • Consumer spending

image of the interior of a modern hi-rise office building

Remote Work Trends

The impact of remote work on commercial real estate vacancy rates is multifaceted.

On one hand, companies reassess their office space needs in light of remote work trends, leading to a potential reduction in their footprint. With employees working remotely, businesses may opt for smaller office spaces or adopt shared workspace models to optimize cost efficiency.

On the other hand, the long-term implications of remote work on commercial real estate demand remain uncertain. While some businesses embrace remote work as a permanent arrangement, others prioritize in-person collaboration and cultural cohesion, necessitating physical office spaces

 The hybrid work model, combining remote and in-office work, further complicates the equation, introducing new considerations for space utilization and allocation.

Throughout all of these complexities, it might make sense to bring in a commercial real estate attorney, who can help walk you through the legal complexities surrounding remote work arrangements, lease agreements, and property transactions. Particularly, this can be helpful when markets become volatile like it was back in 2020.

Consumer Behavior Shifts

Consumer behavior also plays a pivotal role in shaping vacancy rates across various commercial real estate sectors, from retail to industrial.

We all saw a profound impact on retail vacancy rates when the shift to online shopping happened, and still see vacancy issues in Toronto to this day.

We see this in things like the shift to online shopping and e-commerce over traditional brick-and-mortar retailers. However, it could be showing a rise in demand for warehouse and distribution spaces as retailers look for ways to optimize their supply chain.

image of the exterior of a storefront during dusk with a traffic light in front of it

Frequently Asked Questions: Commercial Real Estate Vacancy Rates

What factors influence commercial real estate vacancy rates?

Vacancy rates can be influenced by economic conditions, industry trends, demographic shifts, tenant preferences, and local market dynamics. Changes in supply and demand, new construction activity, and tenant turnover rates can also impact vacancy rates.

How can investors interpret commercial real estate vacancy rate data?

Investors can interpret vacancy rate data by analyzing trends over time, comparing vacancy rates across different submarkets or property types, and benchmarking against regional or national averages. Understanding the underlying drivers of vacancy rate fluctuations is essential for making informed investment decisions.

How can I avoid vacancy rates in my commercial property?

While you can’t predict anything, knowing the following could help you be prepared:

  • Proactive leasing and marketing strategies

  • Maintaining strong tenant relationships

  • Offering competitive lease terms and incentives

  • Conducting thorough due diligence on potential acquisitions

  • Diversifying property portfolios across different sectors and geographic locations could help

How can a real estate advisor help with commercial real estate vacancy rates?

A real estate advisor can provide expertise, market knowledge, and strategic guidance to help investors navigate the complexities of commercial real estate vacancy rates. They can assist with analyzing vacancy rate data, identifying investment opportunities, optimizing property performance, and developing tailored leasing and marketing strategies.

Looking for a real estate partner to help walk you through all the complexities of owning real estate? Reach out to our team at CRE Professionals for trusted real estate advising in the Toronto and Niagara areas!

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