What is Breakeven Occupancy in Commercial Real Estate?
Breakeven occupancy is the occupancy at which a commercial real estate property goes from having an operating deficit to an operating surplus. It can also be defined as the point at which effective gross income (EGI), equals operating expenditures (OpEx) and debt service. If a property is exactly at breakeven occupancy, it's DSCR will be exactly 1.00.
While average breakeven occupancies may be different for different property types, it's a valuable metric for any kind of commercial real estate, including retail, hospitality, office, multifamily, and industrial projects. Breakeven occupancies are typically much lower for hospitality properties, like hotels and resorts, typically averaging between 55%-70%, but are higher for properties like apartment or office buildings.
How to Determine Breakeven Occupancy for a Property
To determine a property's breakeven occupancy, you first need to determine its potential gross income, its operating expenditures, and its debt service, which you do with the formula below.
For example, if a property has a potential gross income of $20,000 per month, operating expenses of $6,000, and $9,000 in debt service, its breakeven occupancy is 75% ($6,000 + $9.000/$20,000). In most cases, lenders prefer a breakeven occupancy of 85% or less before underwriting a commercial real estate loan.
Investors Can Compare Breakeven Occupancy to Local Occupancy Data to Determine Risk
It's particularly important to compare a project's potential breakeven occupancy the historical occupancy of similar projects in the area. This helps investors determine the safety of a potential investment. For example, if an apartment building has a breakeven occupancy of 80%, and the average occupancy of apartment buildings in the area is 85%, the investment may be a risky venture. However, if the average occupancy for apartment buildings in the area is closer to 98%, an investor has a much wider margin of error to work with, making the investment substantially less risky.