Economic versus physical occupancy
Also called Economic occupancy, Physical occupancy.
Physical occupancy is the share of units that are occupied. Economic occupancy is the share of potential rent that is actually collected. The gap between them is everything that stops an occupied unit from paying full rent: loss to lease, concessions, bad debt, employee units and down units.
How it works
Physical occupancy is the number in the marketing material because it is the flattering one. It counts doors, and a door counts whether the tenant is paying market rent, discounted rent, concession-adjusted rent, or nothing at all. Economic occupancy counts dollars, which is what services the debt.
A wide gap is not automatically bad. On a value-add deal it is the thesis: units full, rents below market, upside available as leases roll. What makes it dangerous is when the gap is caused by concessions or delinquency rather than by loss to lease, because those two do not convert to income when the lease rolls. They repeat.
The denominator has to be stated. Economic occupancy measured against market rent is a different number from economic occupancy measured against in-place rent, and both appear in the market. The first captures loss to lease and the second does not, which can move the answer by ten points or more on the same property.
Formula
Economic occupancy = rent actually collected / gross potential rent at market- Physical occupancy = occupied units / total units
- Rent collected excludes concessions given and rent billed but never received
- Measuring against in-place rent instead of market rent excludes loss to lease and produces a higher number
Worked example
220 units, 93 percent physically occupied, market rent $2,090, in-place $1,845.
| GPR at market rent | $5,517,600 |
|---|---|
| Less loss to lease | ($646,800) |
| Less vacancy and credit loss | ($341,000) |
| Rent collected | $4,529,800 |
| Physical occupancy | 93.0% |
| Economic occupancy against market rent | 82.1% |
Eleven points of separation, almost all of it loss to lease rather than non-payment. That is a value-add profile. The same eleven points caused by concessions and bad debt would be an operations problem.
The common mistake
Comparing your economic occupancy to somebody else's
Market surveys and broker packages rarely state which denominator they used, and the two conventions differ by the entire loss to lease. An 82 percent figure measured against market rent and a 93 percent figure measured against in-place rent can describe the identical property. Before benchmarking, reconstruct both from the rent roll so you know which one you are holding, and always decompose the gap into loss to lease, concessions and bad debt, because the three have completely different implications for what happens next year.
Related terms
- Gross potential rentGross potential rent is the rent a property would collect if every unit were occupied for all twelve months at full rent, with no vacancy, no concessions and no delinquency. It is the top line of the pro forma, and everything below it is a deduction.
- Loss to leaseLoss to lease is the difference between what a unit could rent for at today's market rate and what the sitting tenant is contractually paying. It appears as a deduction from gross potential rent when the pro forma is stated at market rent.
- Effective gross incomeEffective gross income is all the revenue a property is expected to collect in a year: gross potential rent, less vacancy, loss to lease, concessions and bad debt, plus other income. It is the revenue figure operating expenses are subtracted from to reach net operating income.
- Break-even occupancyBreak-even occupancy is the occupancy level at which a property's collections exactly cover its operating expenses and debt service, with nothing left over. Below it, the property consumes cash instead of producing it.
- Rent rollA rent roll is the unit-by-unit or tenant-by-tenant schedule of who occupies a property, what they pay, and when their lease ends. It is the primary evidence behind every revenue assumption in an underwriting model.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.