Occupancy Rate
- What Is an Occupancy Rate?
- How to Calculate Occupancy Rate
- Occupancy Rate Formula
- Number of Occupied Units ÷ Total Number of Units
- Number of Occupied Guest Rooms ÷ Number of Available Guest Rooms
- Inventory Occupancy vs. Available Occupancy
- Occupancy vs. Vacancy Rate
- Breakeven Occupancy
- Related Questions
- Get Financing
What Is an Occupancy Rate?
The occupancy rate metric represents the amount of available units in a property in comparison to the amount of units that are currently occupied by tenants. Occupancy rate metrics can be utilized for most commercial property types, but is more commonly used to measure the occupancy in multifamily properties such as apartment buildings and senior living facilities, as well as for hospitality properties like hotels, motels, and resorts.
How to Calculate Occupancy Rate
The occupancy rate calculation for a commercial property is generally a straightforward procedure. The basis of the calculation is simply to illustrate occupancy over a given period of time. That said, there is a slight variation in its calculation depending on the type of property in question. With most asset types, occupancy is a long-term deal, however, with most hospitality class assets – tenancy typically takes place over shorter-term, temporary periods. The difference in the length of tenancy does require that some hospitality assets use metrics measured on a per-night basis (or any reasonable tenancy period). Regardless of the asset class subject to the occupancy rate calculation, the metric is generally represented as a percentage.
Occupancy Rate Formula
For multifamily properties, the occupancy rate can be determined using the following formula:
Number of Occupied Units ÷ Total Number of Units
As an example, if an apartment building has 50 units — two of which are vacant — the property’s occupancy rate would be 96.6%.
48 ÷ 50 = 0.96 = 96% Occupancy Rate
The calculation has a slight modification when it comes to hospitality properties. To find the occupancy rate for a hospitality asset such as a hotel, the formula that is used is:
Number of Occupied Guest Rooms ÷ Number of Available Guest Rooms
Inventory Occupancy vs. Available Occupancy
There are a few categories of occupancy to take into consideration. The distinctions between these are important in gaining actionable data and understanding occupancy as a whole. The calculations discussed so far are broadly categorized as inventory occupancy rates — which uses the number of total units or rooms within a property.
Available occupancy, on the other hand, is the number of occupied units divided by the number of rentable units. This calculation excludes apartments or hotel guest rooms not available for rent. For example, units temporarily out of commission for renovation or cleaning would be excluded, as would a unit reserved for a property manager. An asset’s available occupancy, therefore, is almost always higher than its inventory occupancy.
There’s also a third occupancy calculation worth considering: economic occupancy. Economic occupancy describes the difference between a property’s actual rental income and its gross potential rent, represented as a percentage. So, while a property may have a general occupancy rate of 95%, the property may only have an economic occupancy of 90%, which can make a substantial difference to a commercial property investor.
Occupancy vs. Vacancy Rate
There are many scenarios in which commercial real estate lenders and investors will reference a property’s vacancy rate, rather than its occupancy rate. In some property sectors — including office, industrial and retail — vacancy is generally preferred as a metric, while multifamily investors tend to gravitate toward occupancy rates.
In the most simple terms, vacancy rates are just the opposite of occupancy rates. For example, a property with an occupancy rate of 85% would have a vacancy rate of 15%. Much like occupancy rates, vacancy rates also come in a few varieties, and most commercial real estate transactions will often require scrutiny of both physical and economic vacancy of a target property.
Breakeven Occupancy
Knowing the occupancy rate of a property helps an owner or investor to understand a few important aspects of the financial strength of a property. One of the more important metrics that the occupancy rate helps to clarify is the breakeven occupancy. This figure is the occupancy rate a property must reach in order for revenues to equal operating expenses (OpEx). For hospitality class assets, the percentage of occupied guestrooms is used. Though breakeven occupancy rates vary by property type, they are considered to be an essential part of the commercial loan underwriting process. If a property's occupancy rate is significantly lower than the breakeven occupancy average for that property type, it may be difficult to obtain financing for that property.
Related Questions
What is the average occupancy rate for commercial real estate?
The average occupancy rate for commercial real estate varies by property type. For hotels/motels, the average occupancy rate is 55%. For resorts, the average occupancy rate is 70%. For retirement homes, the average occupancy rate is 85%. For apartment complexes, the average occupancy rate is 88%.
For multifamily properties, occupancy rate is generally measured using the formula:
Number of Units Occupied/Number of Units
For hospitality properties, occupancy rate is measured using the formula:
Number of Occupied Nights/Number of Available Nights
Sources:
What factors affect occupancy rate in commercial real estate?
Occupancy rate in commercial real estate is affected by a few different factors. These include the number of available units in a property, the number of units that are currently occupied by tenants, physical vacancy, economic vacancy, inventory occupancy, available occupancy, and economic occupancy.
The number of available units in a property affects occupancy rate because it determines the total number of units that can be occupied. The number of units that are currently occupied by tenants affects occupancy rate because it determines the number of units that are actually occupied.
Physical vacancy is the opposite of occupancy rate and is determined by the number of units that are currently unoccupied. Economic vacancy is the difference between a property’s actual rental income and its gross potential rent, represented as a percentage.
Inventory occupancy is the actual occupancy divided by the number of existing units, while available occupancy is the actual occupancy divided by the number of leasable (or rentable units). Economic occupancy is generally defined as the difference between a property’s actual rental income and its gross potential rent, represented as a percentage.
How can I increase the occupancy rate of my commercial real estate property?
You can increase the occupancy rate of your commercial real estate property by investing in amenities, such as a café, bicycle parking, and a fitness center. Additionally, you can create community space, such as a picnic table area outside, to draw people to their workspace at very little cost. Additionally, you should do market research on what comparable properties are offering and be realistic with what’s comparable. Lastly, be transparent with the businesses or people in your building and don't raise rents too fast.
For more information, please see the following sources:
What is the best way to calculate occupancy rate for commercial real estate?
The best way to calculate occupancy rate for commercial real estate depends on the type of property. For multifamily properties, occupancy rate is generally measured using the formula:
Number of Units Occupied Number of Units 29 30 For example, if an apartment building had 30 units, and one unit remained vacant over a 6-month period, the property would have a 96.6% occupancy rate for that period.
In comparison, for hospitality properties, occupancy rate is measured using the formula below:
Number of Occupied Nights Number of Available Nights 2,100 3,000 For example, over a 30-day period, an 100-bed hotel has 3,000 "bed nights" available. If during that 30-day period, 70 beds were filled each night, the hotel would have 2,100 occupied bed nights.
What are the benefits of having a high occupancy rate in commercial real estate?
The benefits of having a high occupancy rate in commercial real estate are numerous. A high occupancy rate means that a property is in high demand, which can lead to higher rental rates and increased profits. Additionally, a high occupancy rate can also lead to increased property values, as investors are more likely to purchase properties with a high occupancy rate. Finally, a high occupancy rate can also lead to increased tenant satisfaction, as tenants are more likely to stay in a property that is in high demand.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/occupancy-rate
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/breakeven-occupancy