What vacancy rate should I use for a commercial property?

There is no single right rate. It depends on how many tenants the building has, when their leases end, how long similar space nearby has taken to re-let, and what incentives it took. A building of many small tenants is often forecast with a modest percentage of potential rent. A building with one or two tenants is better modelled lease by lease, with a realistic empty period and incentive at each expiry, because a percentage spreads a single large loss across years in which it will not happen.

Why deduct vacancy if the building is fully let?

Because a forecast or valuation looks beyond today's leases. Tenants leave at expiry, some fail before it, and re-letting takes time, a rent-free period and fees. A fully let building with leases ending inside the forecast will almost certainly lose some rent to those events. The allowance puts a figure on that loss now, so that the income a lender lends against is the income the building can be expected to earn across the period, not only in its best year.

What is the difference between a vacancy allowance and a void period?

A void period is the stretch between one tenant leaving and the next starting to pay, modelled at a particular lease expiry. A vacancy allowance is the wider deduction for rent expected to go missing, and it can be built from void periods, from a percentage of potential rent, or from both. A cash flow that already models voids at each expiry needs at most a small general allowance on top, or the same loss is counted twice.

Does a vacancy allowance include bad debts?

Sometimes. Many forecasts combine empty space and unpaid rent into one line, often called vacancy and credit loss. A lender separates them where it can, because they have different causes: empty space follows the lease dates and the letting market, while unpaid rent follows the tenants' own finances. A building of strong tenants with lumpy expiries and a building of weak tenants on long leases can need the same total allowance for opposite reasons.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Vacancy Allowance: a Worked Example

The same 4% can hide a slope or a cliff.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 6 MIN READ

// THE SHORT ANSWER

The vacancy allowance is the line in a property forecast that says how much rent the owner expects to lose to empty space, and a lender reads it to find out when that loss lands and who pays the interest while it does. Two buildings can carry the same annual allowance and very different risks. Where many small leases end on scattered dates, the loss arrives in small pieces that the other tenants' rent absorbs. Where one tenant pays everything, the loss is a single date on the lease, and the question becomes how the loan is serviced from that date until the space is let again.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.

Read the file →

PART OF Property Development Finance

// 01 — WHY A LENDER READS THE ALLOWANCE

A loan secured on an investment property is repaid from rent. Every ratio the lender sets, from interest cover to debt yield, starts from the property's net operating income, and the vacancy allowance is one of the first deductions on the way there. Set it too low and every ratio below it looks better than the building will deliver.

The lender's interest is not in the percentage itself but in what it stands for. Rent goes missing in three ways: space that is empty today, space that empties when a lease ends and takes months to re-let, and rent a tenant owes but does not pay. Many forecasts fold the second and third into one line. The lender unfolds them, because the second can be dated from the rent roll and the third depends on who the tenants are.

// 02 — HOW THE ALLOWANCE IS BUILT

General method: allowance = potential gross rent × vacancy rate

Expiry method: for each lease ending in the forecast,

P(tenant leaves) × (months empty + months rent-free) × monthly rent

+ letting fees + outgoings the owner pays while empty

The general method suits a forecast for a building with many leases ending at scattered dates, where some space will be empty at any moment and no single departure matters much. The expiry method suits a building where the dates and sizes of the leases are known and lumpy. Valuers in New Zealand, Australia and the UK commonly model a letting-up period, an incentive and leasing costs at each expiry in a discounted cash flow, and some add a small general allowance on top. The two can overlap: if the model already empties a unit at expiry, a general percentage on the same rent counts the loss twice.

Outgoings are the part often forgotten. Under a net lease the tenant pays the rates, insurance and service costs; once the unit is empty the owner pays them. In England, an empty building is generally free of business rates for its first three months empty, six for industrial premises, after which most owners pay full rates; listed buildings and the smallest properties stay relieved until they are reoccupied.

// 03 — THE EXAMPLE

An investor, constructed for this page like every figure in it, owns two properties with the same potential rent of US$1.44m a year, and its forecast takes 4% off each. The rates, months and fees below are the example's, not a market norm.

The first is a trade park of sixteen units, each let for about US$90,000 a year to a plumber, a tile supplier, a gym and the like. Five leases, worth US$450,000, end in the next two years. The lender assumes two of the five tenants leave.

Owner's allowance: 1,440,000 × 4% = 57,600 a year

Per unit that empties:

6 months empty 90,000 × 6/12 = 45,000

3 months rent-free to new tenant 90,000 × 3/12 = 22,500

letting fee, 15% of a year's rent = 13,500

outgoings while empty = 6,000

87,000

Two units over two years: 174,000 ÷ 2 = 87,000 a year

As a share of potential rent: 87,000 ÷ 1,440,000 = 6.0%

The owner's 4% is light, but the shape is right: the loss comes in small pieces, and the other fourteen units keep paying. The second property is a workshop let whole to one engineering firm, with eighteen months left on the lease. The owner's loan on it is US$10m at 7%, and the forecast assumes a year to find a new tenant and six months rent-free to win one.

Owner's allowance: 1,440,000 × 4% = 57,600 a year

If the firm leaves at expiry:

12 months empty = 1,440,000

6 months rent-free to the next tenant = 720,000

letting fee, 15% of a year's rent = 216,000

outgoings for 12 empty months = 180,000

2,556,000

Interest on a US$10m loan at 7% over the 18 months with no rent

= 1,050,000

On this building the 4% is not a light estimate of the risk; it is a description of a different building. The workshop will be full or empty, and if it empties, eighteen months of interest falls due with no rent to pay it. The question that matters is whether the firm stays, what it would take to keep it, and where the US$1.05m comes from if it goes.

// 04 — WHAT A LENDER READS BESIDE IT

The allowance is easily confused with the vacancy the building has today. Physical vacancy is a fact on the rent roll; the allowance is a forecast of space that is let now and may not be later. A fully let building still needs an allowance, and a half-empty one needs a leasing plan rather than a percentage. It is also not the vacancy rate a market report publishes for a city's offices or a region's warehouses, which describes the market's stock, not this building's leases.

The figure that gives the allowance its shape is the weighted average lease expiry, read with the expiry profile behind it. A long WALE with one large expiry in year three is a single-let risk wearing a multi-let building's average. Tenant quality sits beside both: a building full of tenants who pay late needs a credit-loss allowance whatever its expiry dates.

DEFINED IN ONE PARAGRAPH → · THE RENT ROLL, READ → · WEIGHTED AVERAGE LEASE EXPIRY →

// 05 — WHERE IT DECIDES A FILE

On a multi-let building the allowance mostly moves the loan amount. A lender that sizes on net operating income, through interest cover or debt yield, lends less against a 6% allowance than a 4% one, and the difference is a negotiation about evidence: how long units in this location have stood empty, and what incentives it took to fill them.

On a single-let building the allowance moves the structure. The lender may ask for the loan term to end well before the lease does, for amortisation that brings the debt down before expiry, for rent to be swept into a reserve in the final year, or for a guarantor who can carry the interest through a void. Any of these answers the question the percentage hides, which is who pays while the building is empty.

DEBT YIELD, WORKED → · DEBT SERVICE COVERAGE RATIO → · LOAN TO VALUE RATIO →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

GOV.UK, Business rates relief: empty property relief (England) — States that an empty property pays no business rates for three months, industrial premises for a further three, after which most owners pay full rates, with listed and low-value properties relieved until reoccupied — section 02.

// QUESTIONS PEOPLE ASK

What vacancy rate should I use for a commercial property?: There is no single right rate. It depends on how many tenants the building has, when their leases end, how long similar space nearby has taken to re-let, and what incentives it took. A building of many small tenants is often forecast with a modest percentage of potential rent. A building with one or two tenants is better modelled lease by lease, with a realistic empty period and incentive at each expiry, because a percentage spreads a single large loss across years in which it will not happen.
Why deduct vacancy if the building is fully let?: Because a forecast or valuation looks beyond today's leases. Tenants leave at expiry, some fail before it, and re-letting takes time, a rent-free period and fees. A fully let building with leases ending inside the forecast will almost certainly lose some rent to those events. The allowance puts a figure on that loss now, so that the income a lender lends against is the income the building can be expected to earn across the period, not only in its best year.
What is the difference between a vacancy allowance and a void period?: A void period is the stretch between one tenant leaving and the next starting to pay, modelled at a particular lease expiry. A vacancy allowance is the wider deduction for rent expected to go missing, and it can be built from void periods, from a percentage of potential rent, or from both. A cash flow that already models voids at each expiry needs at most a small general allowance on top, or the same loss is counted twice.
Does a vacancy allowance include bad debts?: Sometimes. Many forecasts combine empty space and unpaid rent into one line, often called vacancy and credit loss. A lender separates them where it can, because they have different causes: empty space follows the lease dates and the letting market, while unpaid rent follows the tenants' own finances. A building of strong tenants with lumpy expiries and a building of weak tenants on long leases can need the same total allowance for opposite reasons.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Workout and recoveries managerTakes the files that have gone wrong and works out how much the bank gets back, and how.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE ECONOMY · COLLATERAL MARKETS

An office building earns US$1.0m a year of net operating income. Buyers price such buildings at a 5% yield, so it is valued at US$20m. The loan against it is US$12m.

If the yield buyers want rises to 6%, what is the loan-to-value?

3 MORE ON THE ECONOMY · COLLATERAL MARKETS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHVacancy allowance What is a vacancy allowance in a property valuation or cash flow?