What is the Occupancy Rate?
The occupancy rate is defined as the ratio of rented units to the total count of available units in a building, tower, housing unit, state or a city. It is one of the critical and important concepts for those investors who are fairly interested in dealing with real estate transactions.
Usually, a real estate player purchases several accommodation units, and they maintain a portfolio on it. Their primary intent is to derive rental income from such units. Therefore, for such investors, they try to assess the performance of the real estate portfolio by determining the occupancy.
The occupancy rate is inversely related to the vacancy rate. The vacancy rate is expressed as the ratio of vacant units to the total available space. It can be bifurcated to physical and economic.
Occupancy Rate Formula
Mathematically, at the physical level is expressed as follows: –
The economic occupancy rate is a metric that analyses in terms of gross potential rent collected by the owner. Mathematically it can be expressed as follows: –
The formula for physical occupancy Rate formula can be computed by using the following steps:
- Step 1: Firstly, determine the count of units that is available to be occupied.
- Step 2: Next, Determine the count of occupied units.
- Step 3: Next, Divide the count of occupied units with the total available units.
The formula for economic occupancy rate formula can be computed by following the below steps: –
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- 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 to the gross potential rent that could be derived from the economic or accommodation unit.
Examples of Occupancy Rate Formula (with Excel Template)
Let us take the example of commercial property. The commercial property is composed of 200 units. The count of units that are occupied accounts to 140 units. Help the investor determine the physical occupancy rate.
Therefore, the physical occupancy for commercial property is at 70 percent.
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.
Therefore, the physical occupancy rate for the portfolio is at 75%.
Calculation of Economic Occupancy Rate can be done as follows,
Relevance and Use of Occupancy Rate Formula
A high occupancy rate signifies typically that the real estate properties are being utilized to derive maximum rental income. The reason is that 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.
In short, it can be inferred that this rate helps predict a steady stream of income. An investor 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.
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, and they are able to break-even over their investments as well as they can 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.
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. Apart from commercial real estate, the occupancy has significant applications in hospitals, hotels, and senior housing units and call centers. In call centers, usually, a team leader 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 to calculate the occupancy rate along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –