What is Economic Occupancy?

Published by Thomas Herold in Economics, Investments, Real Estate

'Economic Occupancy' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Economic Occupancy refers to the rate of paying tenants for an apartment building or some other rented out space like an office building. The managers and owners of apartment buildings and complexes commonly measure their success with both physical and economic occupancy rates. While these two concepts are related, they are not exactly the same. With physical occupancy, this pertains to the percentage of the total apartments (or commercial office suites) that the owners successfully rent. The rate of economic occupancy describes how many of these tenants are actually paying rent. The economic assessment speaks volumes more than the physical occupancy rate, since ultimately the economic one explains the apartment complex of office building’s financial performance.

Another way to think of economic occupancy pertains to the percentage of rents which the owners and managers successfully collect from their tenants as measured against the total sum of money which could physically be collected. This ultimately describes how successfully or unsuccessfully management is optimizing potential revenues.

A number of reasons present themselves for why a building’s unit might not be paying rent. The simplest explanation is that the units could be vacant. There are also gaps which exist from when one tenant leaves a unit until another finishes moving into the unit. Some buildings or complexes will find they need to offer discounts to lure in tenants. This might be half off the first rental month costs. Other tenants could depart while still owing the management company rents or fees. Many times, the manager of the apartments, maintenance head, or security guards will live rent-free on the property as part of their benefits as well. The downside is that while it is useful to have such key personnel living on site, it lowers the revenue stream on the property every month.

Figuring up the true economic occupancy is simple. This requires the property manager to divide the actually collected rent by the potential maximum collectable rent if every tenant paid the full price. It helps to consider a real world example of the concept. For any complex that possess 20 occupied apartments which rent for $1,000 per month, perhaps 16 actually pay the rent for one reason or another. This would amount to $16,000 divided by $20,000 for an 80 percent rate. Yet the physical occupancy would amount to a full 100 percent in any case. The best case scenario is to have as close as possible an economic occupancy as physical occupancy rate.

The measure for economic occupancy has various helpful applications. It demonstrates any complexes or office buildings which are suffering from serious issues. If the rate is low, then problems exist with either rent collection, tenant turnover, or both. It may mean that the complex or office building management is inadequate or the base of tenants is unable or unwilling to pay their rent because of property problems. Low rates of occupancy eat into the ability to pay operating costs of the property. Ultimately they mean that profits will be lower or outright losses will be present instead.

Realtors often use the economic assessment over the physical occupancy rates when they are attempting to value an apartment complex or commercial office building. Those properties which are losing money display an inability to retain their tenants. It is also important to compare apples to apples with this measurement. Calculating the economic occupancy on a week by week basis will show a bias of high economic results the final week of the month and a low result the first week of the month. This is why realtors will prefer to have the occupancy calculated economically on a month by month basis, as it filters out the discrepancies of weekly fluctuations.

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The term 'Economic Occupancy' is included in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.