Occupancy rate measures the share of a real-estate portfolio that is occupied or leased under a defined convention.
A simple physical version is:
Occupancy rate = Occupied units or area ÷ Total available units or area
If 950 of 1,000 apartment units are occupied, physical occupancy is 95%.
For office, industrial, and retail portfolios, companies may calculate occupancy using rentable square feet rather than unit counts.
Occupied and leased are not always identical
A signed lease may not yet have commenced, and an occupied space may be in a free-rent or concession period. REITs can therefore report measures such as:
- physical occupancy;
- leased occupancy;
- economic occupancy;
- same-store occupancy; or
- stabilized portfolio occupancy.
These measures answer different questions.
Economic occupancy
Economic occupancy generally compares collected or recognized rental economics with the amount that could have been generated at full occupancy under a defined rent assumption. Its exact construction can vary materially by issuer and property type.
A 95% physical occupancy rate does not imply 95% economic occupancy if concessions, delinquency, nonpayment, or below-market leases are significant.
Why occupancy matters
Occupancy influences Net Operating Income because vacant space usually produces less rental revenue while many property costs continue.
Changes in occupancy can also affect:
- Same-Store NOI;
- leasing commissions and tenant-improvement spending;
- rent growth and concessions;
- bad-debt expense; and
- the value investors assign through Capitalization Rate assumptions.
Higher occupancy is not automatically better
A landlord can maintain very high occupancy by accepting weak rents or generous concessions. Another landlord may tolerate temporary vacancy while replacing below-market leases at much higher rents.
Investors should therefore read occupancy with rental-rate growth, lease spreads, concessions, tenant credit, lease duration, and property-level expenses.
Comparison rule
Before comparing occupancy across REITs, verify:
- physical versus leased versus economic definition;
- unit count versus square-foot denominator;
- same-store versus total portfolio scope;
- stabilized versus lease-up properties;
- reporting date versus period average; and
- treatment of redevelopment and held-for-sale assets.
Occupancy is an operating metric, not a complete measure of property profitability or investment quality.
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