"It is a basic belief that recession depresses household formation that drives the housing market," said Cutts. When employment is low, so-called "boomerang children" return to live with their parents and more people double up in shared spaces, lowering demand for housing units. Foreclosures further exacerbated the situation.

But Cutts believes the vacancy cycle is starting to change, as pent-up demand and mild but positive job growth bring people back to the housing market. Meanwhile, the building slowdown to virtual replacement levels has tempered the housing inventory. Barring an economic about-face, Cutts anticipates a gradual improvement that will bring residential vacancy rates to more normal levels over the next two years.

Longer-Term Trends Weigh on Commercial Property

The outcome may be quite different in the commercial market. Vacancy levels in commercial realty have soared in recent years, especially for high-end office space where vacancy rates are hovering between 18 and 20 percent in many places, said Executive Vice President Carl Russell, CCIM, of the George J. Smith real estate agency in Milford, Conn. In a recession, people are less willing to pay for marble lobbies and other nonessential features.

Longer-term trends, however, including the spread of technological efficiencies, are also expected to cut into a rebound in the commercial market. In some cases, the need for office space has permanently declined with the advent of powerful computers that replace much of the sales and reference space. Electronic scanners and off-site document storage are eliminating the need for file cabinets, so office space requirements are getting significantly smaller in many industries.

As for retail commercial space, vacancies have increased sharply due to the unprecedented building surge of the 1990s and uncertain job market that has driven consumers to favor purchases of fewer and less expensive goods. Russell cited a big-box store in Connecticut which sat empty for two years after a high-end electronics retailer moved out. It is finally getting a new tenant--a merchandise liquidator.

The normally optimistic Russell, who travels the county teaching high-level classes in commercial real estate for the National Association of Realtors' Commercial Investment Real Estate Institute, said he has witnessed three recessions in his 35 years in real estate industry, and that this one is different "not so much in the depth but the breadth of it." He anticipates that jobs will return, bringing with them the increased demand for goods and services that will drive down the commercial-vacancy rate, but improvement may not start for 18 to 24 months. And some spaces may need to be revamped to meet changing standards, including energy efficiencies.

What it All Means for Insurers

Someone owns these vacant properties. As so many properties lie empty, things can happen--including fire, vandalism, squatting, theft, and injury--that can potentially create losses far higher than the lack of rental income.

The risk for vacant property is often different from that for occupied property, and in most cases, a standard building policy will not fully protect the property owner, said Marla Donovan, Vice President of Product Development at Burns & Wilcox. The insurance industry treats vacant property differently than it does occupied units, so she suggests that owners of vacant property seek professional analysis of their coverage as soon as the occupancy status changes.

Donovan credits the insurance industry for its willingness to create new products to address this problem and avert the need for government intervention. "It is the private insurance mechanism at its best," she said.

It is also good business for the insurance industry. "While property-casualty has been flat or shrinking, Burns & Wilcox grew by 15 percent in vacant property, and our agent clients have made money solving problems for their customers," Donovan said.

Given the uncertain recovery expected for vacant property, the demand for those services is not likely to diminish anytime soon.