Lake Havasu Vacancy Risk Demands Careful Underwriting
Vacancy is where investors stumble hardest in Lake Havasu. Too often, they assume fast lease-up on the way in, stable occupancy at exit, and that replacement reality will take care of itself.
Tight inventory and few listings can create a false sense of security. Tenant depth is not the same as listing depth. Deals look good on paper because buyers bet on speed. Speed to lease. Speed to stabilize. Speed to exit. In a small market, that speed is never guaranteed.
Fail to underwrite downtime properly, and you’re speculating on timing rather than investing in real numbers.
The Illusion of a Fast Lease-Up
I hear it all the time:
- “It’s a good location.”
- “It’s already occupied.”
- “Worst case, we’ll lease it in six months.”
Six months, according to whom? Lake Havasu is not a five-million-person metro. Tenants come from a smaller economic base. Inventory might be tight, but tenant absorption is never automatic.
The mistake is confusing scarce listings with deep demand. In larger markets, you can often backfill a vacancy with just another version of the same tenant. In smaller markets, you need the right tenant, not just any tenant. That takes time.
What Vacancy Costs You
Vacancies result in more than missed rent. It’s:
- Mortgage payments
- Property taxes
- Insurance
- CAM
- Maintenance
- Leasing commissions
- Tenant improvement dollars
- Opportunity cost
If your deal was underwritten on thin margins, vacancy doesn’t just dent returns; it can wipe them out. Projected 12% returns can shrink to 4 or 5 percent once you factor in 12 to 18 months of downtime. Leasing commissions, tenant improvements, and rent concessions all eat into the numbers.
True net income drops fast when the building goes dark. And when income falls, value follows. We back into value from income; if income drops, your exit shrinks.
Vacancy is not a line item. It’s the lever that moves your entire capital stack.
A Lesson in Vacancy
A two-story office building, no elevator, with an older-tenant demographic. On purchase, the plan was simple: if a tenant leaves, we’ll lease it in six months.
Then both tenants left at once.
Now, the building sat fully vacant, and functional constraints made leasing more difficult. Not having an elevator limits who can use the space. Stairs rule out many medical and professional tenants with older clients. The buyer pool narrowed instantly.
We marketed aggressively and adjusted pricing. It took over a year and a half to refill.
During that time, the owner paid debt service, taxes, insurance, and upkeep with zero offsetting income. Leasing commissions came out of pocket. Tenant improvements required fresh capital. The spreadsheet assumption of six months became eighteen.
In Phoenix, that building might have leased in half the time. In Lake Havasu, absorption is slower. That’s not pessimism; it’s market structure.
How Smaller Markets Amplify Vacancy Risk
In a major metro, you typically see:
- A broader tenant pool
- Faster business turnover
- More inbound migration
- A deeper investor buyer pool
In Lake Havasu, you see:
- Fewer tenants per square foot of inventory
- Longer marketing timelines
- More reliance on local operators
- A buyer pool that shrinks quickly when occupancy drops
When a vacancy stretches out, the impact compounds. Carrying costs stack. Buyers sense risk. Cap rates expand. Lenders tighten.
Tight inventory helps pricing when occupancy is strong. But once a building goes dark, the same market can feel very thin.
In smaller markets, stability beats upside. Always protect the downside first.
Backing Into Value with Vacancy Stress Tests
Investors should run three vacancy stress tests before committing capital.
- Underwrite twelve months of vacancy. Can the deal survive that without a capital call or fire sale?
- Calculate full replacement costs. That includes broker fees, tenant improvement allowances, legal, and marketing. If you are not budgeting real numbers, you are not underwriting properly.
- Test rent reset risk. What if the next tenant pays less? Market rents shift, tenants negotiate. If your deal only works at peak rent and zero downtime, it does not pencil.
To protect the downside, we don’t hope for perfection. We model friction and test whether the property continues to deliver acceptable true net income over time.
If the deal cannot survive stress, it’s not an investment. It’s a bet.
Mispricing Vacancy Risk at Exit
The next major mispricing happens at exit.
Many investors assume stability when it’s time to sell. They project current rent forward and apply a cap rate as if nothing changes. But what happens if a lease rolls just before listing? If a tenant downsizes? If market rents soften and renewals come in lower?
Net income drops. Buyers adjust. Cap rates expand as uncertainty rises. The buyer pool narrows because lenders underwrite trailing income, not pro forma optimism. In a small market, a single vacancy can shift perception quickly. And perception drives pricing.
Price vacancy risk correctly on the way in, or the market will price it for you on the way out.
Investor Questions About Vacancy Risk
Is vacancy really the biggest risk in Lake Havasu commercial real estate?
In my experience, yes. Price volatility is typically moderate. Land constraints are visible. Tenant depth, however, is limited. Once a space goes dark, time works against you. Carrying costs continue while you search for the right operator.
How long should downtime be underwritten?
In this market, twelve months is a disciplined baseline. Some spaces will lease faster. Others will not. Modeling a full year forces realism. If the numbers still work, you have protected the downside.
Does tight inventory reduce vacancy risk?
Tight listings support pricing when occupancy is strong. They do not guarantee rapid absorption once a building is vacant. Listing supply and tenant demand are separate forces. Confusing them leads to mispricing.
How do tenant improvements affect true net income?
Tenant improvements come from current cash flow or future proceeds. Either way, they reduce effective yield. Ignoring them in underwriting inflates projected returns and distorts value.
What property types carry higher vacancy risk?
Functional obsolescence increases exposure. Older two-story offices without elevators are one example. Niche layouts or oversized suites also narrow the tenant pool. The more specialized the space, the thinner the demand.
Should I avoid properties with short-term leases?
Not automatically. Flexible leases can create upside if rents sit below market. But you must model renewal risk and downtime. If several leases roll at once, exposure multiplies quickly.
How do we evaluate exit risk tied to vacancy?
Lease rollover schedules, tenant credit strength, and local absorption rates all matter. We also test what happens if net income drops before sale. If the projected value compresses beyond acceptable limits, the pricing fails to reflect the risk.
Protect Your Investment Before You Commit
Vacancy is the biggest risk in small-market commercial real estate. Once it starts, it’s expensive to stop.
At Shuffler Commercial Realty, we stress test every deal. Real downtime, replacement costs, and rent resets show whether it truly pencils.
Protect the downside. Start your conversation with us today.
