What is Occupancy Rate in Commercial Real Estate?
Occupancy rate compares the the amount of available units in a property to the amount of units that are currently occupied by tenants. Occupancy rate can be used for all commercial property types, but is most commonly utilized to measure multifamily properties like apartment buildings and senior living facilities, as well as hospitality properties like hotels, motels, and resorts.
Occupancy Rate Examples and Formula
For multifamily properties, occupancy rate is generally measured using the formula:
Number of Units Occupied/Number of Units
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.
29/30 = 0.966 = 96.6% Occupancy
In comparison, for hospitality properties, occupancy rate is 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 a few different types of occupancy rates to consider. Inventory occupancy is the actual occupancy divided by the number of existing units. In comparison, 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. In addition, in multifamily properties, a unit may often be given to a property manager as compensation, which further reduces the amount of available units that can be rented.
That being said, there’s also a third kind of occupancy to consider; economic occupancy. Economic occupancy is generally defined as 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%, with free units, turnover periods, the property may only have an economic occupancy of 90%, which could make a substantial difference from the perspective of a commercial property investor.
Occupancy Rates for Different Property Types
Different property types have different breakeven occupancy ratios. This is defined as 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:
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 mortgage for that property.
Occupancy vs. Vacancy Rate
In many situations, commercial real estate lenders and investors will focus on a property’s vacancy rate, as opposed to its occupancy rate. Vacancy rates are simply the opposite of occupancy rates. For instance, a property with a 85% occupancy rate would have a vacancy rate of 15%. Like occupancy rates, vacancy rates come in a few varieties; and lenders and investors will often want to know both a property’s physical and economic vacancy.