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Occupancy Rate in Commercial Real Estate
Occupancy rate is an important metric for temporary housing, and can be measured by dividing the number of occupied units by the number of available units.
- What is Occupancy Rate in Commercial Real Estate?
- Occupancy Rate Formula
- Inventory Occupancy vs. Available Occupancy
- Occupancy Rates for Different Property Types
- Occupancy vs. Vacancy Rate
- Questions? Fill out the form below to speak with a commercial real estate loan specialist.
- Related Questions
- Get Financing
What is Occupancy Rate in Commercial Real Estate?
Occupancy rate compares 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 Formula
For multifamily properties, occupancy rate is generally measured using the formula:
Number of Units Occupied/Number of Units
Occupancy Rate Example
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:
Hotels/Motels: 55%
Resorts: 70%
Retirement Homes: 85%
Apartment Complexes: 88%
What is the average occupancy rate for commercial real estate?
The average occupancy rate for commercial real estate varies by property type. Hotels/Motels have an average breakeven occupancy rate of 55%, Resorts have an average breakeven occupancy rate of 70%, Retirement Homes have an average breakeven occupancy rate of 85%, and Apartment Complexes have an average breakeven occupancy rate of 88%.
For multifamily properties, occupancy rate is generally measured using the formula: Number of Units Occupied/Number of Units. For hospitality properties, occupancy rate is measured using the formula: Number of Occupied Nights/Number of Available Nights.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/occupancy-rate
What factors affect occupancy rates in commercial real estate?
Factors that affect occupancy rates in commercial real estate include the local economy, the quality of the property, the location of the property, the availability of amenities, and the pricing of the units.
The local economy can have a major impact on occupancy rates. If the local economy is strong, businesses may be more likely to move into the area, and people may be more likely to move into the area as well. This can lead to higher occupancy rates.
The quality of the property is also important. If the property is well-maintained and has modern amenities, it may be more attractive to potential tenants.
The location of the property is also important. If the property is located in a desirable area, it may be more attractive to potential tenants.
The availability of amenities can also affect occupancy rates. If the property has amenities such as a gym, pool, or other recreational facilities, it may be more attractive to potential tenants.
Finally, the pricing of the units can also affect occupancy rates. If the units are priced too high, potential tenants may be less likely to move in.
How can landlords increase occupancy rates in commercial real estate?
Landlords can increase occupancy rates in commercial real estate by carefully planning rent increases, doing market research on what comparable properties are offering, and being transparent with tenants. Additionally, landlords can be conservative with rent increases while still adding on new revenue from their property, even if other work is ongoing.
For more information, please see 5 Proven Tips for Your Next Value Add Investment and Occupancy Rate in Commercial Real Estate.
What is the difference between gross and net occupancy rates in commercial real estate?
The difference between gross and net occupancy rates in commercial real estate is that gross occupancy rate is the actual occupancy divided by the number of existing units, while net occupancy rate is the actual occupancy divided by the number of leasable (or rentable units). Gross occupancy rate is almost always lower than net occupancy rate, since some units are likely to be temporarily out of commission due to cleaning or renovations, or given to a property manager as compensation.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/occupancy-rate
What is the average vacancy rate for commercial real estate?
The average vacancy rate for commercial real estate varies depending on the type of property and the market it is located in. Generally, the average vacancy rate for office space is around 10-15%, while the average vacancy rate for retail space is around 5-10%.
When a borrower applies for a commercial mortgage, lenders will typically use a physical vacancy rate of at least 5% when underwriting a loan. They may also use market vacancy or building vacancy, if these rates are higher than the property’s economic vacancy. Market vacancy is the historical vacancy for similar buildings in that same exact market, while building building vacancy, which is the exact historical vacancy rate for that specific building.
How can landlords reduce vacancy rates in commercial real estate?
Landlords can reduce vacancy rates in commercial real estate by keeping a diverse tenant mix. This means having several tenants of varying sizes and in various industries. This way, vacancy costs are far less likely to skyrocket when one company downsizes. Additionally, landlords can reduce vacancy rates by keeping asking rent prices within the reach of the target renter population, ensuring that repairs and renovations are completed in a timely manner, and making sure the property is located in a desirable area.
Sources:
- What is Occupancy Rate in Commercial Real Estate?
- Occupancy Rate Formula
- Inventory Occupancy vs. Available Occupancy
- Occupancy Rates for Different Property Types
- Occupancy vs. Vacancy Rate
- Questions? Fill out the form below to speak with a commercial real estate loan specialist.
- Related Questions
- Get Financing
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.