Definition
The physical occupancy rate is the proportion of units that are occupied by tenants as compared to the total number of units in the building available to rent. The economic occupancy rate is the proportion of the rent that is collected as compared to the rent that should have been collected for those units at posted rates. Meaning, this is the percentage of money that was actually paid to your business versus what should have been paid to your business.
Any good owner will know the physical occupancy of their facility on any given day. These same owners often don’t calculate economic occupancy, though, and they certainly don’t compare the two values to see the true picture of their facilities profitability.
Examples
If you have 100 units and 80 of them are rented at full price, then your physical and economic occupancy are the same: 80%. Where this changes is if you have units rented at a two-for-one discount, units filled by the owners and not being rented, units filled at a lower rate for an introductory period, employee theft, delinquency, or a variety of other reasons. Let’s look at each of these, and see the impact on the bottom line shown thru economic occupancy.
Let’s say you have 100 units, and 80 of them are rented at full price and 10 are rented on a two-for-one discount. Your total available units is 100 and you have 90 rented, so your physical occupancy is 90%. Even though you have 90 rented, only 85 are paid rentals (and 5 are free), so economic occupancy is only 85%. This means you are only achieving 85% of your total possible rental income.
Let’s look at another example. Again, you have 100 units and 20 of them are available to be rented. In this case, 75 are actually rented and 5 are being used by the owners to store the owners’ stuff. In that case, your physical occupancy is 80%, but your economic occupancy based on the unit numbers is 75%.
Delinquency also affects economic occupancy. If out of the 80 that are occupied there are 10 that are non-paying and you haven’t processed the auction/eviction on them, then your physical occupancy is still 80% but your economic occupancy is 70%. Only 70% of your tenants are paying tenants.
In the cases above, economic occupancy is calculated by comparing unit counts. It can and should also be calculated by looking at the rent that should’ve been received versus the rent that was actually received.
Continuing to use the example above of 100 units total with 80 occupied, let’s also say that each unit rents for $1. In that case, you should be receiving $80 each month (ignoring fee income). If you find that you are only receiving $73, then that indicates another issue like employee theft.
Note that I stated “ignoring fee income” in the paragraph above. This is because even if all of your units are filled at full value (with no discounts, delinquency, theft, etc.), your economic occupancy can be different from your physical occupancy. This happens when you take into consideration fees, which is why fees should be removed when calculating economic occupancy based on rental income.
In Conclusion
Economic occupancy is typically lower than physical occupancy, by 2-5%. Any value higher than that indicates that further issues need to be explored. Many of the common culprits are above, and should help you determine any issues that need to be addressed.