Underwriting a 55 plus building with conventional turnover assumptions can double the vacancy loss, and here is the math

Here is a loss worth studying because it comes from an assumption that looks safe. Take a small deal, 44 units, age-restricted, in a secondary market. An operator underwrites 8 percent economic vacancy because that is the number that holds up for conventional garden apartments in that market across several buildings. Actual year one economic vacancy in this scenario comes in at 15.4 percent. Physical occupancy averages 92, so the shortfall comes from days vacant per turn rather than from empty units. Conventional turns in that market run 14 to 21 days. In age-restricted product they run 47 days on average, with a couple of units sitting past 90. The reason is the qualified applicant pool. Age restriction removes most of the market. The applicants who do come are usually moving out of a house they own, so their timeline is tied to a sale, and they do not sign a lease and move in three weeks. They tour, they think about it for two months, they talk to their children, then they sign for a start date six weeks out. On 44 units at an average $1,340, that vacancy gap costs about $52k against budget in year one. That is enough to miss a debt covenant test by a small margin in Q3 and to put the operator in an uncomfortable conversation with the lender. The lesson: underwrite days-to-lease from actual comps in age-restricted product rather than from conventional buildings, and keep a bigger operating reserve in year one on any product type the operator has never run before.