What is the Occupancy Rate?

Usually, a real estate player purchases several accommodation units and maintains a portfolio. Their primary intent is to derive rental income from such units. Therefore, such investors try to assess the performance of the real estate portfolio by determining the occupancy.

The occupancy rate is inversely related to the vacancy rateVacancy RateThe vacancy rate means the number of units available on a rental basis that are vacant or unoccupied in an apartment, building, complex, hotel, or colony, at a given period. read more. The vacancy rate is expressed as the ratio of vacant units to the total available space. It can be bifurcated into physical and economic.

Occupancy Rate Formula

Mathematically, the physical level is expressed as follows: –

Occupancy Rate = Total Units Rented / Total Available Space or Units

The economic occupancy rate is a metric that analyses potential gross rent collected by the owner. Mathematically it can be expressed as follows: –

Economic Occupancy Rate = Total Gross Rent Collected / Total Gross Potential Rent

Explanation

The formula for physical occupancy Rate formula can be computed by using the following steps:

  • Step 1: Firstly, determine the number of available units to be occupied.Step 2: Next, Determine the count of occupied units.Step 3: Next, Divide the occupied units by the total available units.

The formula for economic occupancy rate formula can be computed by following the below steps: –

  • Step 1: Initially, determine the rent provided by each unit.Step 2: Next, determine the sum of the total rent derived from the portfolio.Step 3: Next, determine the rent collected from the occupied units and add them up.Step 4: Next, Divide the gross rental income collected by the potential gross rent derived from the economic or accommodation unit.

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Examples of Occupancy Rate Formula (with Excel Template)

Example #1

Let us take the example of commercial property. The commercial property is composed of 200 units. The count of units that are occupied accounts for 140 units. Help the investor determine the physical occupancy rate.

Solution

  • =140/200

Therefore, the physical occupancy for commercial property is at 70 percent.

Example #2

Let us take the example of a real estate investor who holds 20 units of residential accommodation. The investor can derive $80,000 from the entire portfolio, whereas it earns $55,000 from the occupied units. The number of occupied units stands at 15 units. Help the investor determine the physical and economic occupancy rate.

  • =15/20

Therefore, the physical occupancy rate for the portfolio is at 75%.

Calculation of Economic Occupancy Rate can be done as follows,

  • =$55000/$80000

Relevance and Use of Occupancy Rate Formula

A high occupancy rate typically signifies that the real estate properties are being utilized to derive maximum rental income. It gives a clear indication of how much-expected cash flows a real estate investor can earn from its portfolio. Further, a well-maintained real estate portfolio can generate a good stream of income and can be regarded as the gold mine in disguise or a true money maker.

An investor who may be interested in investing in the shopping mall or medium shopping centers can earn a steady stream of income if he goes ahead with the investment. If the investor has to face a situation of low occupancy, then an investor has to pitch hard and locate more tenants who can occupy such vacant units. In short, it can infer that this rate helps predict a steady stream of income.

The investor with low occupancy has to quickly achieve this so that they don’t have to bear the maintenance cost of the empty units. They can break even over their investments and make up for their property taxes from these derived income streams. Additionally, since these spaces are vacant, the investor loses the opportunity to earn maximum income.

Apart from commercial real estate, occupancy has significant applications in hospitals, hotels, senior housing units, and call centers. The investor who is bugged with the problem of prolonged low occupancy rates suggests that the units are not well maintained, or such units may be located at an undesirable location, or the units may be brought up with bad construction materials. Incall centers, a team leader usually assesses how much time an associate spends in the call-in line with the allocated hours.

This article has been a guide to Occupancy Rate and its definition. Here we discuss the formula for calculating the occupancy rate, practical examples, and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Short Sale in Real Estate DefinitionWhat is Real Assets?Calculate Depreciation for Rental PropertyWhat is Capital Loss?