Hey Friends,
The vacancy numbers look fine on paper. But if you’re a California multifamily investor and you’re relying on reported vacancy rates to understand how the market is really performing, you might be missing what’s actually happening inside these deals.
There’s a growing gap between what properties report and what they’re actually earning. And it’s quietly showing up in cash flow, valuations, and refinance conversations in ways that are catching investors off guard.
What Shadow Vacancy Actually Is
Shadow vacancy isn’t empty units. It’s occupied units that aren’t performing at market rate.
It shows up as:
- Free rent concessions given to new tenants that don’t appear in headline asking rents
- Below market renewals offered to retain tenants who would otherwise leave
- Lease up incentives on new deliveries that inflate occupancy while suppressing actual income
- Long term tenants in rent controlled units paying significantly below current market
A property can be 97% occupied and still be significantly underperforming its projected income. That’s shadow vacancy, and in CA’s current market it’s more common than most investors realize.
Why It’s Getting Worse Right Now
In markets where new supply has come online and tenant options have increased, landlords are competing harder to fill and retain. That competition isn’t always showing up in vacancy statistics. It’s showing up in concessions.
A typical concession package in some CA submarkets right now includes one to two months of free rent on a 12 month lease. That’s an 8% to 17% effective rent reduction that never appears in the asking rent figure.
When you underwrite a deal based on asking rents and reported occupancy without accounting for what tenants are actually paying net of concessions, you’re working with numbers that don’t reflect reality.
What It Means for Financing
This is where shadow vacancy becomes a real problem for investors.
Lenders are getting better at spotting it. When a property’s actual collected income doesn’t match its reported occupancy and asking rents, underwriters start asking questions. DCF analysis based on inflated rent assumptions gets walked back. Loan proceeds shrink.
For investors who acquired properties based on pro forma rents that assumed concessions would burn off quickly, the refinance conversation is now happening with income numbers that are lower than projected and lenders who are stress testing aggressively.
How to Underwrite Around It
The investors who are getting this right are looking past the surface numbers.
That means:
- Reviewing actual collected rent rolls, not just asking rents
- Asking for concession history and current leasing incentives
- Stress testing NOI at effective rents rather than face rents
- Understanding the rent controlled tenant base and what below market leases look like at scale
- Building realistic assumptions about how long concessions will remain in the market
If you’re acquiring a property today, the question isn’t just what are rents. It’s what are tenants actually paying and how long until that normalizes.
The Takeaway
Occupancy rates and asking rents are telling an incomplete story in CA multifamily right now. Shadow vacancy is real, it’s widespread, and it’s affecting cash flow and valuations in ways that don’t show up in the headline data.
Investors who understand how to look past the surface numbers will underwrite better deals, avoid overpaying, and have far fewer surprises when it’s time to refinance.