What “Occupancy rate” Means in Real Estate — Simple Definition
Plain-language definition (physical vs. economic)
Occupancy rate (real estate) is the percentage of a property’s rentable units or area that are actually occupied or in use at a given time. In plain terms, it answers: “How much of this building is being used or paying rent?”
There are two common senses:
- Physical (or actual) occupancy: occupied units or leased square feet ÷ total available units or square feet × 100. This is a head-count or area-based measure.
- Economic (revenue) occupancy: actual rent collected ÷ gross potential rent × 100. This measures how much of the potential income the property actually realizes.
Why occupancy matters for investors, owners and operators
- Primary signal of demand and leasing effectiveness — low occupancy usually means lower cash flow and higher risk.
- Drives income line items: gross potential rent, effective gross income and ultimately NOI and valuation.
- Informs operational decisions (marketing, leasing incentives, maintenance) and underwriting assumptions (vacancy reserves, stress tests).
Quick takeaway sentence for reporting headlines
Occupancy rate shows how much of your income potential is being captured — physical occupancy measures space in use, while economic occupancy measures money actually collected.
The Core Formula(s) — How to Calculate Occupancy Rate
Standard formula for units or rooms: occupied units ÷ total units × 100
Formula: Occupancy % = (Occupied units ÷ Total units available) × 100
Area-based formula for commercial: occupied leasable area ÷ total leasable area × 100
Formula: Occupancy % = (Occupied leasable sq ft ÷ Total leasable sq ft) × 100
Revenue-based (economic) occupancy: actual rent collected ÷ potential rent × 100
Formula: Economic Occupancy % = (Actual rent collected ÷ Gross potential rent) × 100. Gross potential rent equals rent if every unit/space were rented at full contractual/market rent for the period.
Worked example: step-by-step calculation (multifamily units)
Example: 30-unit apartment building, 27 occupied.
- Physical occupancy = 27 ÷ 30 = 0.9 → 90%
- If potential monthly rent = $12,000 (30 × $400) but collected rent = $10,800 then economic occupancy = $10,800 ÷ $12,000 = 90% (same here).
Worked example: step-by-step calculation (office by square feet)
Example: 50,000 rentable sq ft, 44,000 sq ft leased.
- Occupancy = 44,000 ÷ 50,000 = 0.88 → 88%
- For partial leases, use leased sq ft for the period (pro‑rata for partial months).
Worked example: hotel occupancy and relation to RevPAR
Hotel example: 100-room hotel, 85 rooms sold tonight → occupancy = 85 ÷ 100 = 85%.
RevPAR (revenue per available room) links occupancy to price: RevPAR = ADR × Occupancy% or RevPAR = Total room revenue ÷ Available rooms. If ADR = $150 and occupancy = 85%, RevPAR = $150 × 0.85 = $127.50.
Occupancy vs. Vacancy vs. Economic Occupancy — Key Differences
Physical (physical/actual) occupancy explained
Physical occupancy counts occupied units or leased square feet. It’s straightforward and useful for operational metrics (turnover, showings, physical availability).
Vacancy rate as the complement — when to use which
Vacancy rate = 100% − Occupancy rate. Use vacancy when focusing on available inventory or loss-to-market arguments. Vacancy is common in underwriting (vacancy reserves) while occupancy often appears in operating reports.
Example: 10% vacancy means 90% occupancy.
Economic occupancy (revenue-based) — why it can tell a different story
Economic occupancy captures rent collection and concessions. A property can have high physical occupancy but low economic occupancy if many tenants pay below-market rent, receive concessions, or if leased-not-occupied units exist.
When to prefer unit/area measures vs. revenue measures in underwriting
- Use unit/area occupancy for spatial utilization, leasing pipelines and capex planning.
- Use economic occupancy when modeling cash flow, NOI and valuation — it reflects actual revenue performance and concessions impact.
How to Calculate Occupancy by Property Type
Multifamily (units) — counting partial-month moves, leased vs. occupied
Count units physically occupied for the reporting period. For partial-month moves, either pro‑rate occupancy for the month (e.g., a move-in on day 16 = 0.5 unit-month) or standardize on end-of-month snapshot — always state which.
Office/Industrial/Retail (square footage) — dealing with partial leases and subleases
Sum committed/occupied square feet. For partial periods pro‑rate by lease start/end dates. Include subleases as occupied if they generate rent to the owner; exclude if owner carries the lease and space is vacant.
Hotels (rooms sold) — daily/seasonal averaging and RevPAR link
Hotels typically report daily occupancy and use averages (daily, monthly, TTM). Use RevPAR to combine price and occupancy for revenue analysis.
Short‑term rentals (Airbnb/STR) — nights sold, listing availability and seasonality
Measure nights sold ÷ nights available per listing. Remove blocked nights (owner use, maintenance) from availability. Seasonal spikes make averaging (30-day, 90-day) vital.
Mixed-use properties — consolidating unit and area measures
Report separately by component (multifamily units, retail sq ft, office sq ft) and provide a consolidated economic occupancy using potential and actual rent across all components to get a single revenue-based figure.
Common Data Issues & Adjustments to Get Accurate Occupancy
Seasonality and averaging periods (monthly, quarterly, trailing 12 months)
Short-term properties (hotels/STR) need daily or monthly averages; quarterly or trailing-12-month (TTM) smoothing prevents misleading spikes or dips.
Partial-month moves, pro‑rata rents and move-in/move-out timing
Decide on a method (snapshot vs. pro‑rata). For underwriting, pro‑rata gives a more realistic monthly revenue picture; for reporting, snapshots are simpler but must be disclosed.
Rent concessions, free months and how they affect economic occupancy
Concessions reduce actual collected rent and therefore economic occupancy. Report concessions separately and show both gross potential rent and effective rent after concessions.
Renovations, offline units and held-for-lease inventory
Exclude offline/renovation units from “available” totals or list them separately as held-for-lease — state your treatment. Including them as available can understate true occupancy.
Data source reliability and reconciling management reports vs. market vendors
Cross-check management reports with lease rolls, bank deposits and market vendors (CoStar, Yardi, STR). Reconcile differences and disclose methodology.
Benchmarks & What’s “Good” — By Asset Class and Market Context
Typical occupancy ranges: multifamily, office, retail, industrial, hotels
- Multifamily: often 88–96% depending on market strength.
- Office: wide range 70–95% depending on market cycle and submarket.
- Retail: 80–95% (neighborhood vs. regional malls differ).
- Industrial: typically high — 90–98% in tight markets.
- Hotels: highly seasonal — 50–85% typical across cycles; luxury vs. economy vary.
How market cycle, location and building class change expectations
Top-tier assets in prime locations should track above market averages; secondary assets and tertiary markets will be below. During downturns, expect occupancy compression and longer lease-up times.
Interpreting sudden changes — red flags vs. normal adjustments
- Red flags: sudden occupancy drop with no planned renovations, large unexplained concessions, or concentrated tenant departures.
- Normal: seasonal swings, expected lease expirations or temporary offline units for upgrades.
Where to find market-specific benchmarks (CoStar, Yardi, STR, local MLS)
Use major providers for comparable market data and local brokers/MLS for granular intel. For hotels, STR is standard; for multifamily and commercial, CoStar/RealPage/Yardi provide benchmarking.
How Occupancy Impacts Financials, Underwriting & Valuation
Effect on Gross Potential Rent, Effective Gross Income and NOI
Lower occupancy reduces collected rent, shrinking Effective Gross Income (EGI) and NOI after expenses. Economic occupancy is the best immediate predictor of cash available for operations and debt service.
Sensitivity to cap rates and valuation scenarios (valuation example)
Small changes in occupancy → material NOI swings → large valuation changes at a given cap rate. Example: $10,000 monthly NOI lost → $120,000 annually; at a 6% cap rate that equals $2M in value swing.
Underwriter perspective: stress tests and vacancy reserves
Underwriters apply vacancy reserves or stress-case occupancy (e.g., market vacancy + 200–300 bps) to ensure debt service coverage under downside scenarios.
Lender/investor reporting: transparency and common adjustments
Report both physical and economic occupancy, note concessions, offline units, and whether occupancy is snapshot or averaged. Lenders often adjust reported income to “stabilized” market rents before underwriting.
Reporting Best Practices — How to Present Occupancy to Stakeholders
Always state the definition used (physical vs. economic) and time period
Include a one-line definition: e.g., “Occupancy = occupied units ÷ total available units; snapshot as of 30‑Sep‑2025.” If reporting economic occupancy, state the gross potential rent used.
Recommended formats for investor decks, loan packages and management reports
- Investor deck: include both physical and economic occupancy, trend chart (12 months), and concessions/online units note.
- Loan package: show lease roll, rent roll, vacancy assumptions and a stressed cash flow.
- Management report: month-over-month and trailing-12-month occupancy, delinquencies, and upcoming expirations.
Disclosure examples: concessions, seasonality, offline units
Example disclosure: “Economic occupancy of 84% excludes three units offline for renovation and applies pro‑rata concession adjustments of $1,500 for Q3.”
Common mistakes that lead to misunderstandings or overstated performance
- Failing to disclose whether occupancy is physical or economic.
- Counting leased-but-not-occupied units as occupied without note.
- Mixing snapshot and pro‑rata approaches without explanation.
Practical Ways to Improve Occupancy — Operations & Leasing Tactics
Marketing and pricing strategies (dynamic pricing, targeted ads)
Use market-rate benchmarking, targeted digital ads and dynamic pricing tools to fill vacancies faster without unnecessary concessions.
Lease incentives and when concessions help vs. hurt NOI
Short-term concessions (free month) can accelerate lease-up and reduce overall carrying cost, but long-term overuse erodes economic occupancy and NOI.
Tenant retention and reducing turnover costs
Invest in tenant experience, timely maintenance and lease renewal incentives that cost less than repeated vacancy and turnover expenses.
Physical improvements and repositioning (short- and long-term ROI)
Targeted capital improvements that meet market demand (amenities, unit refresh) can justify higher rents and improve occupancy over time.
Process improvements for faster lease-up (showings, screening, digital lease)
Streamline tours, adopt self-showing and e-sign leases, and speed up screening to convert prospects quickly.
Real World Application (Required Section)
Fictional scenario — small multifamily investor: calculating physical and economic occupancy with numbers
10-unit building. Market (potential) monthly rent per unit = $1,200 → Potential Gross Monthly Rent = $12,000.
- Occupied units: 8 → Physical occupancy = 8 ÷ 10 = 80%.
- Collected rent this month = $8,400 after concessions and two discounted leases → Economic occupancy = $8,400 ÷ $12,000 = 70%.
Step-by-step: compute occupancy, show effect on monthly NOI and annual valuation
- Potential gross monthly rent = $12,000.
- Actual collected rent = $8,400 (economic occupancy 70%).
- Operating expenses (estimate) = 40% of collected rent = $3,360/month.
- Monthly NOI = $8,400 − $3,360 = $5,040 → Annual NOI = $60,480.
- Valuation at 6% cap rate = $60,480 ÷ 0.06 = $1,008,000.
If the investor increased collected rent to $10,800 (90% economic occupancy) by lease-up efforts:
- New monthly NOI = $10,800 − ($10,800 × 40%) = $6,480 → Annual NOI = $77,760.
- New valuation at 6% = $1,296,000 (≈ $288k uplift).
Decision points: negotiate price, raise rents, or invest in lease-up based on results
- Low economic occupancy vs. price paid suggests negotiating a lower purchase price or holding price contingent on lease-up.
- If market rents support higher rents, invest in marketing and concessions targeted only to accelerate lease-up (short-term cost for long-term value).
- If demand is weak, consider property upgrades or repositioning to a higher-demand tenant profile before raising rents.
Quick checklist of next steps the investor should take after seeing the occupancy result
- Verify lease roll and bank deposits to confirm collected rent.
- Identify causes of gap between physical and economic occupancy (concessions, delinquency, offline units).
- Estimate cost and timeline to increase collected rent to market levels.
- Run sensitivity: NOI and valuation at current, stabilized, and stressed occupancy scenarios.
- Decide immediate action (price negotiation, targeted lease-up budget, or capital improvements).
Quick Reference — Formulas, Templates & Calculator Inputs
Short cheat sheet: all formulas in one place
- Physical occupancy (%) = (Occupied units or leased sq ft ÷ Total available units or sq ft) × 100
- Economic occupancy (%) = (Actual rent collected ÷ Gross potential rent) × 100
- Vacancy rate (%) = 100% − Occupancy rate (%)
- RevPAR = ADR × Occupancy% = Total room revenue ÷ Available rooms
Sample input table (units, leased units, vacant units, potential rent, collected rent)
| Metric | Value |
|---|
| Total units | 10 |
| Occupied units | 8 |
| Potential monthly rent | $12,000 |
| Collected monthly rent | $8,400 |
One-line template to include in reports and emails to lenders/investors
“Occupancy: 8/10 units = 80% physical (snapshot as of [date]); economic occupancy: $8,400 collected ÷ $12,000 potential = 70% (includes $X concessions; 2 units offline for renovation).”
Where to Get Reliable Occupancy Data
Major commercial data providers (CoStar, Yardi, RealPage, STR) and what they cover
CoStar: broad commercial and multifamily metrics. Yardi/RealPage: multifamily and property-level performance. STR: hotel performance (occupancy, ADR, RevPAR).
Public sources and local market intel (MLS, municipal filings, broker reports)
Local MLS and broker reports provide granular rental comps and vacancy listings. Municipal filings and planning departments can indicate new supply that will affect occupancy.
How to validate management-reported numbers
Cross-check rent rolls against bank deposits, tenant ledgers and leases. Reconcile monthly management reports with third-party market data and explain discrepancies in the reporting package.
Frequently Asked Questions (Quick Answers)
Does occupancy include leased-but-not-yet-occupied units?
Only if your methodology defines leased-but-not-yet-occupied as occupied. Best practice: report leased-but-not-occupied separately and disclose whether you include them in occupancy.
How do concessions affect occupancy vs. revenue measures?
Concessions lower economic occupancy (actual rent collected) but don’t change physical occupancy unless concessions are tied to move-ins. Always disclose concession amounts and period.
Which occupancy should I use for underwriting a loan?
Underwriters favor economic occupancy for cash-flow modeling; they also apply vacancy reserves and stress scenarios. Include both measures but base debt service ability on economic occupancy and stressed cases.
How often should I report occupancy to investors?
Monthly reporting is common for operations; quarterly for high-level investor updates. Use TTM or quarterly averages for long-term performance trends.
Conclusion & Practical Next Steps for Readers
One-paragraph summary of what occupancy tells you
Occupancy rate real estate indicates how much of a property’s available space is in use (physical) or how much potential rent is being collected (economic). Both are essential: physical occupancy measures utilization, economic occupancy measures cash flow.
Immediate actions for each audience type (investor, owner, manager, analyst)
- Investor: request both physical and economic occupancy, verify rent roll and run valuation sensitivities.
- Owner: identify causes of any gap between physical and economic occupancy and prioritize actions (lease-up, pricing, renovation).
- Manager: streamline leasing processes, confirm rent collection and record concessions clearly.
- Analyst: normalize data (averages, pro‑rata adjustments) and benchmark against comparable market data.
Links to further reading and templates (market data, lease-up checklist)
For related glossary terms see vacancy rate and RevPAR. Use the templates above to standardize reporting and the checklist to guide your lease-up plan.
Appendix — Sample Calculations and Excel-ready Formulas
Copy-paste formulas for Excel/Sheets
=OccupiedUnits/TotalUnits
=OccupiedSqFt/TotalSqFt
=ActualRentCollected/GrossPotentialRent
=ADR*OccupancyRate
Example T12 calculation adjusting for seasonality and concessions
To compute TTM economic occupancy in Excel:
=SUM(CollectedRent_Month1:CollectedRent_Month12)/SUM(PotentialRent_Month1:PotentialRent_Month12)
Adjust potential rent months by removing offline units or adding pro‑rata availability.
