By Yoan Valiente, Founder & CEO · Updated · Part of the CRE investment glossary
Physical and economic occupancy
Physical occupancy counts units: how many are leased on a given day. It is simple, and it treats a unit at a deep discount, a unit in a free-rent month and a unit whose tenant has not paid the same as a full-rent unit.
Economic occupancy counts dollars. It asks how much of the rent the property could have earned was actually collected over a period. Lenders, appraisers and asset managers watch it because a building can look full and still collect much less than it should.
The formula
Over a period, usually a month or a year:
Economic occupancy = rent collected ÷ gross potential rent Rent collected = gross potential rent − vacancy − loss to lease − concessions − credit loss
- Gross potential rent (GPR): every unit at market rent for the whole period.
- Vacancy: rent lost on empty units. Loss to lease: market rent minus the lower rent in place on leased units. Concessions: free rent and discounts. Credit loss: rent billed but not collected.
- Definitions vary. Some reports leave loss to lease out of the numerator, state rent against billed rent, or include other income. This page uses collected rent over GPR at market, and the example below follows it. State the definition whenever you quote the number.
Worked example: a 100-unit property
A fictional 100-unit property has market rent of $1,500 a month, so gross potential rent is 100 × $1,500 × 12 = $1,800,000. Six units were vacant on average, so physical occupancy is 94%. Its other losses reduce collections further.
Rent collected is $1,611,000, so economic occupancy is 89.5%, 4.5 points below physical occupancy. The example figures are illustrative, not market figures.
| Line | Arithmetic | Amount |
|---|---|---|
| Gross potential rent | 100 × $1,500 × 12 | $1,800,000 |
| Vacancy | 6% of GPR | −$108,000 |
| Loss to lease | 2% of GPR | −$36,000 |
| Concessions | 1% of GPR | −$18,000 |
| Credit loss | 1.5% of GPR | −$27,000 |
| Rent collected | $1,800,000 − $108,000 − $36,000 − $18,000 − $27,000 | $1,611,000 |
| Economic occupancy | $1,611,000 ÷ $1,800,000 | 89.5% |
Why it matters and where it connects
Economic occupancy is the other side of the same losses that build up effective gross income. The gap between GPR and rent collected is the same loss total; here it is $189,000, or 10.5% of GPR. A property with strong physical occupancy and weak economic occupancy usually has a concession, bad-debt or loss-to-lease problem.
It also feeds break-even analysis: break-even occupancy shows how low occupancy can fall before the property cannot cover its expenses and debt service, and economic occupancy shows how close the property already is.
Common mistakes
Occupancy numbers get quoted loosely:
- Comparing one property’s physical occupancy with another’s economic occupancy.
- Quoting an annual figure from a strong month, or a single month as the year.
- Not saying whether loss to lease and other income are in the calculation.
- Treating a unit under a free-rent concession as fully occupied for income purposes.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.