What best describes a stabilized vacancy estimate?
Correct Answer
C) Expected typical vacancy supported by relevant market and subject evidence.
Stabilized vacancy is a supported estimate of expected typical performance for the property and market, avoiding unrepresentative short-term extremes. Subject history and persistent property characteristics remain relevant; it is not necessarily the same area-wide rate, not a fixed mandated percentage, and not a guarantee of continuous occupancy.
Why This Is the Correct Answer
Option C is correct because stabilized vacancy is the expected typical vacancy supported by relevant market and subject evidence. It reflects the investor's anticipated rent loss due to average market vacancy and tenant turnover. It may differ from the subject's actual vacancy on the valuation date.
Why the Other Options Are Wrong
Option A: The best historical vacancy year of the subject, used without further investigation.
Option A uses the subject's best historical vacancy year without further investigation. Picking the most favorable year ignores typical performance and market evidence, so it is not a supported stabilized estimate.
Option B: An assurance that no tenant will leave during the lease term.
Option B describes an assurance that no tenant will leave during the lease term. A stabilized vacancy estimate is a forecast of typical loss, not a promise of continuous occupancy.
Option D: A fixed rate set by regulation for each property type and market.
Option D describes a fixed rate set by regulation for each property type and market. Stabilized vacancy is an appraiser's supported estimate based on evidence, not a mandated percentage.
Typical, supported, expected
Stabilized vacancy is what is typical, supported by evidence and expected going forward. It is not the best year, a promise or a fixed rule.
How to use: Use these three words to test each answer choice in a stabilized vacancy question.
Exam Tip
Choose the answer that ties vacancy to supported evidence of typical performance, and reject answers built on guarantees or one-off figures.
Common Mistakes to Avoid
- -Using the property's best year as the stabilized rate
- -Treating stabilized vacancy as the current vacancy on the valuation date
- -Assuming a regulator sets vacancy rates
Concept Deep Dive
Analysis
This question tests the meaning of stabilized vacancy. It is an estimate of typical expected vacancy supported by market and subject evidence, avoiding short-term extremes. The wrong options describe cherry-picked history, an assurance of full occupancy, or a mandated rate.
Background Knowledge
Stabilized occupancy reflects average market vacancy and tenant turnover over time. It may or may not match the current vacancy of the submarket or the subject on the valuation date. Appraisers support the estimate with market surveys, comparable properties and the subject's own history.
Real-World Application
An appraiser values a suburban office building that was 98% leased last year but sits in a submarket averaging higher vacancy. She reviews market surveys and the subject's multi-year history to support a stabilized vacancy estimate.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
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Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
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Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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The subject property is a multi-tenant retail center with mid-term leases to regional tenants and NOI of $96,000. An appraiser extracts overall rates from three recent sales. Sale 1, at 7.5%, has long leases to national tenants. Sale 2, at 8%, has mid-term leases to regional tenants. Sale 3, at 9.3%, has short leases and frequent tenant turnover. What is the most reasonable value indication?