How to calculate economic occupancy in multifamily
How to Calculate Economic Occupancy
Economic occupancy in is a measure of the actual income generated by a property compared to its potential income if it were fully leased at market rates. Unlike physical occupancy, which measures the percentage of units that are leased, economic occupancy accounts for the financial performance of the property, taking into consideration factors like unpaid rent, concessions, and below-market rent rates.
Here's how to calculate it:
- Determine the Gross Potential Rent (GPR): This is the maximum amount of income your property would generate if all units were rented at market rates without any vacancies. For each unit, you would multiply the market rate rent by the number of units of that type, then sum these amounts for all unit types.
- Adjust for Loss to Lease: If any units are rented below market rates, you need to subtract this discrepancy to reflect the actual rent being collected. Loss to lease is the difference between the actual rent collected and what could have been collected at market rates.
- Adjust for Vacancy Loss: This is the income lost due to units being vacant. Calculate the total potential rent for vacant units and subtract it from the GPR.
- Adjust for Other Income Losses: This includes non-payment of rent, concessions given to tenants, and any other income losses such as fees that are not being collected.
- Calculate Actual Collected Income: Sum the actual income collected from all sources, including rent, parking fees, laundry income, etc.
- Calculate Economic Occupancy Rate: Divide the actual collected income by the Gross Potential Rent and multiply by 100 to get the percentage. This reflects the economic occupancy rate of your property.
The formula looks like this:
A property can be 100% physically occupied but have an economic occupancy rate less than 100% if tenants are paying below-market rates, there are concessions, or there is income loss from other sources. Economic occupancy gives a more accurate picture of a property's financial performance than physical occupancy alone.
