A square is always a rectangle but a rectangle isn’t always a square. The same concept applies to vacant space and available space. It seems to reason that if a space is vacant is should be available, and one could also argue that available space would also have to be vacant. This is not necessarily true and when you throw vacant available space in the mix, now you have a recipe for confusion.
Every year each municipality’s department of tax administration assesses all the properties within their municipality, both residential and commercial. As of January 1, 2019, the Fairfax County Department of Tax Administration assessed 362,089 separate properties. The goal is to determine each property’s market value within the assessment to sales ratio for the purposes of levying taxes. Residential properties trade much more frequently than commercial properties and are thus easier to assess from a sale comparison standpoint. Furthermore, most residential properties are owner occupied and thus do not have other factors to consider such as market rental, vacancy, and absorption rates. Commercial properties, on the other hand, have a myriad of factors that contribute to a property’s market value and involve complex calculations.
Departments of tax administration consider a number of mitigating factors that can reduce a commercial property’s market value, particularly vacancy. Juxtaposed with residential real estate, commercial properties are mostly income producing and the revenue that a property generates or is cable of generating greatly impacts its market value. Multi-tenant properties can have varying levels of occupancy and, in addition to the lost revenue from space sitting empty, there are costs associated with leasing up the property, i.e. leasing commissions, tenant improvement allowances, etc. The DTA understands this and uses various metrics to arrive at a defensible and logical market value.
So, what metric provides the most accurate measure of the amount of unleased space in a (sub)market? Let’s start by defining the separate terms:
Vacant space refers to all space not currently occupied by a tenant, regardless of any lease obligation that may be on the space. “Vacancy rate” is the most commonly used term to discuss the ratio of leased space versus unleased space; however, vacant space can be either available or unavailable. A good example would be a space that has been leased but is still undergoing construction and/or has not delivered yet. The space is still vacant but it is not available.
The total amount of space that is currently being marketed as available for lease or sale in a given time period. Available space refers to any space that is available but does not specify if the space is vacant, occupied, available for sublease, or available in the future. A tenant could be actively marketing their space for sublease, but is still occupying the space (not vacant), or a property could be under construction or going through a renovation, in which case the landlord could actively market the space for lease; making it both available and vacant.
Now we come to the answer to our answer, which is also the metric used by departments of tax administration when assessing a commercial property in a particular (sub)market:
Vacant Available Space
Space which is currently vacant and is currently being marketed as available space. Because available space can be both vacant or occupied and because vacant space only refers to the occupancy of a space without regard to any lease obligation tied to the space (available or not), the amount of vacant available space is the best and most accurate measure of the amount of unleased space in a specific (sub)market. The more supply of [unleased] space the more competition. This puts downward pressure on rental rates (lowering a property’s potential gross income) and, more relevant to this discussion, it increases the amount of time in which a landlord can expect to lease their property to the submarket’s frictional vacancy, all of which lower a property’s market value (and associated tax bill).