What is Occupancy Rate in Commercial Real Estate?
Occupancy rate is one of the most important metrics for temporary housing, which includes multifamily properties like apartment buildings, as well as hospitality properties, like hotels, motels, and resorts. Occupancy rate can be measured using the formula below:
Number of Occupied Nights/Number of Available Nights
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.
2,100/3,000 = 0.7 = 70% Occupancy
Inventory Occupancy vs. Available Occupancy
When we look at occupancy rate, there are actually two different types of occupancy rates to consider. 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). For larger properties, inventory occupancy is almost always lower than available occupancy, since some units are likely to be temporarily out of commission due to cleaning or renovations.
Occupancy Rates for Different Property Types
Different property types have different breakeven occupancy ratios, that is, the percentage of nights a property must be occupied in order for revenues to equal operating expenses (OpEx). Below, you can see the average breakeven occupancy rates for different kinds of multifamily and hospitality properties:
- Hotels/Motels: 55%
- Resorts: 70%
- Retirement Homes: 85%
- Apartment Complexes: 88%
While breakeven occupancy rates may vary by property type, they are always 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 a commercial loan for that property.