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.

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.

When calculating breakeven occupancy in commercial real estate, you should consider the potential gross income, operating expenses, and debt service of the property. To calculate the breakeven occupancy, use the formula:

It's also important to compare the potential breakeven occupancy to 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.

Breakeven occupancy is an important factor for lenders when considering small business financing. 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. If the average occupancy for a particular type of business 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. This helps lenders determine the safety of a potential investment and can make small business financing more accessible.

The primary benefit of achieving breakeven occupancy in commercial real estate is that it allows investors to determine the safety of a potential investment. By comparing a project's potential breakeven occupancy to the historical occupancy of similar projects in the area, investors can get a better sense of the risk associated with the 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.

Achieving breakeven occupancy also allows investors to determine the DSCR of a property. If a property is exactly at breakeven occupancy, its DSCR will be exactly 1.00. This is important for investors to consider when evaluating loan products, as lenders typically require a minimum DSCR for loan approval.

There are several strategies that can be used to increase breakeven occupancy in commercial real estate. These include:

• Reducing operating expenses by negotiating better terms with vendors and suppliers, or by investing in energy-efficient upgrades.
• Increasing rental rates to increase potential gross income.
• Improving the property's amenities and features to attract more tenants.
• Advertising the property more aggressively to increase visibility.

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