What is the difference between physical occupancy and economic occupancy?

What is the Difference Between Physical Occupancy vs Economic Occupancy in Multifamily?

Physical occupancy and economic occupancy are two distinct metrics used in the multifamily industry to measure different aspects of a property's performance:

Physical Occupancy

Definition: Physical occupancy refers to the percentage of rental units in a property that are currently occupied by tenants. It's a straightforward measure of how many units are filled versus how many are available.

Calculation: It is calculated by dividing the number of occupied units by the total number of units in the property and then multiplying by 100 to get a percentage.

Focus: This metric focuses solely on whether the units are occupied, regardless of whether the tenants are paying rent or how much rent they are paying.

Economic Occupancy

Definition: Economic occupancy refers to the percentage of potential rental income that is actually being collected. It takes into account not only whether units are occupied but also whether the full rent is being paid.

Calculation: It is calculated by dividing the actual rental income received by the total potential rental income if all units were occupied and paying full rent, then multiplying by 100.

Focus: This metric focuses on the financial aspect of occupancy, taking into account factors like rent concessions, unpaid rent, and units occupied by non-paying tenants.

Key Differences

• Nature of Measurement: Physical occupancy is a measure of space utilization, while economic occupancy is a measure of financial performance.
• Sensitivity to Rent Collection: Physical occupancy is not affected by rent collection issues, whereas economic occupancy is directly impacted by the amount of rent actually collected.
• Insight into Financial Health: Economic occupancy provides deeper insight into the property's financial health. A property can have high physical occupancy but low economic occupancy if many tenants are not paying their full rent.
• Impact of Rent Discounts and Delinquencies: Economic occupancy is affected by rent discounts, delinquencies, and bad debts, unlike physical occupancy.

While physical occupancy gives an idea of how full a property is, economic occupancy provides a more accurate picture of its financial performance and profitability. Both metrics are important for property managers and investors to understand the overall health and viability of a multifamily property.