Physical occupancy and economic occupancy are not the same number

Ask how a property is performing and the usual answer is an occupancy figure. Ninety-four percent, ninety-six percent. It sounds like a complete answer.

It is one of two numbers, and it is the less useful one.

Physical occupancy counts units with a tenant in them, divided by total units. Simple, and it is what most reports show.

Economic occupancy compares rent actually collected to the rent the property could collect if every unit were leased at market rent with nothing lost. It captures everything physical occupancy ignores: concessions, delinquency, units occupied by staff, and the gap between what current leases charge and what the market would pay.

The arithmetic separates them quickly. This is an illustration, not a real property. Take 100 units at a market rent of $1,400, so gross potential rent is $140,000 a month. Now apply four reductions. Five units vacant costs $7,000. Concessions equivalent to $4,000. Delinquency of $4,200. Loss to lease, meaning existing leases sitting below market, of $6,000.

Collections are $118,800 against potential of $140,000. Economic occupancy is about 84.9 percent, while physical occupancy is 95 percent. Ten points apart, and the ten points are money.

Now value the gap. At 95 percent physical occupancy the property would bill $133,000 a month. It collects $118,800. The difference is $14,200 a month, or $170,400 a year. At a six percent cap rate that corresponds to $2,840,000 of value, and none of it shows up in the occupancy figure.

This is why a property can be described as full while the operating statement disappoints. It is also why a plan built on lifting physical occupancy from 93 to 96 percent can deliver less than promised. The other three components can move the wrong way at the same time.

There is a practical trap in comparisons. A sponsor reporting physical occupancy and a competitor reporting economic occupancy will look different even if the properties perform identically. When a number arrives without a definition attached, it is worth asking which one it is.

Ask for both. What is physical occupancy and what is economic occupancy, for the trailing twelve months, month by month? What are the four components of the gap and how has each moved? What does the underwriting assume for economic occupancy at stabilisation?

A property can be full of people and short of rent.

When someone quotes you an occupancy figure, do you ask which one they mean?