Loss to Lease in Commercial Real Estate

What Loss to Lease Measures

Loss to lease is the difference between what every unit would earn at today's asking rent and what the leases currently in place actually command. It is the cost of a rent roll signed in the past being carried into the present.

A property with 100 units asking $1,850 a month has a gross potential rent of $2,220,000 a year. If the leases in place average $1,700, the rent actually scheduled to arrive is $2,040,000. The $180,000 difference is the loss to lease — 8.1% of gross potential rent.

It is not vacancy, a concession, or a collection problem. Every one of those units is leased and paying. The gap exists because the leases were signed at rents that were market at the time and no longer are.

Loss to Lease vs Gain to Lease

The same line runs in both directions. When in-place rents sit above current asking rents — a market that has softened since the leases were signed — scheduled rent exceeds gross potential rent and the figure is negative. That is a gain to lease.

A gain to lease is not the good news it sounds like. It means the in-place rent roll cannot be re-leased at what it currently earns, so every renewal and every turn is a step down. Loss to lease, by contrast, is upside you have not captured yet.

Because one line carries two facts of opposite sign, it cannot be normalised with an absolute value. A year of loss to lease and a larger gain to lease do not sum to a bigger loss; they sum to a gain.

Why Vacancy Must Be Taken on Scheduled Rent, Not GPR

This is where a spreadsheet quietly loses money that is really there.

The build-up runs gross potential rent → less loss to lease → scheduled rent → less vacancy → effective gross income. Vacancy has to be charged against scheduled rent, because a vacant unit costs you the rent its lease would actually have commanded — not the asking rent nobody is paying.

Charge vacancy on gross potential rent instead and you deduct a slice of the loss to lease a second time, having already deducted it in full one line above.

The error is exactly the vacancy rate applied to the loss to lease — 6% of $180,000, or $10,800 a year. Capitalised at 5.5%, that is roughly $196,000 of value written off a property that never lost it.

The error scales with both inputs. A property with a wide loss to lease and a high vacancy assumption loses the most, which is precisely the value-add profile where the mistake is most likely to be made.

Does Loss to Lease Burn Off on Its Own?

No — and a model that assumes it does is underwriting an outcome rather than projecting one.

If loss to lease is grown at the same rate as rents, it stays a constant share of gross potential rent across the hold. That is the neutral assumption: the gap neither widens nor closes by itself.

Closing it is a decision with costs attached. You raise rents at renewal and accept the turnover, or you renovate and re-lease. Both belong in the model as explicit changes to the pro forma rent, not as a gap that quietly evaporates because the projection was built to make it do so.

The test of a proforma is simple: if you cannot point at the line where the loss to lease closes and say what was done to close it, it should not be closing.

Common Mistakes

• Charging vacancy on gross potential rent. Deducts the same gap twice, as above.
• Folding loss to lease into the rent base. Growing scheduled rent and calling it gross potential rent produces the same effective gross income but hides the deduction — the analyst cannot see the gap, let alone underwrite closing it.
• Taking the absolute value of the line. Destroys the distinction between loss to lease and gain to lease, and turns a softening market into apparent upside.
• Reading it off an operating statement. An operating statement reports what was collected. Gross potential rent is a fact about the rent roll and today's asking rents; a T-12 cannot know it.
• Comparing it across properties without the unit mix. A 9% loss to lease on studios and on three-bedrooms are different amounts of money and different re-leasing risk.

What It Looks Like in a Model

In Crevanta, gross potential rent is the top line of the pro forma and loss to lease is deducted beneath it as its own figure, with vacancy taken on the scheduled rent that remains. The gap is therefore visible and arguable rather than folded invisibly into a rent assumption — you can see how large it is, model closing part of it, and show a lender or a partner exactly where the upside in the pricing came from.

Sources

• National Apartment Association — Income & Expenses Surveys: the recurring industry benchmark for multifamily income and operating expense line items.
• National Multifamily Housing Council — Quarterly Survey of Apartment Market Conditions: quarterly readings on rent and market direction.
• Institute of Real Estate Management: standards and terminology for property-level income and expense reporting.