Occupancy Ratio

Definition of "Occupancy ratio"

Written by

Patty Orchard

EXP Realty LLC

The occupancy ratio is the ratio of rented or used space to the total amount of space available. An occupancy ratio or occupancy rate is used by analysts when hospitals, senior housing, hotels, bed-and-breakfasts, or other types of rental units are discussed to determine the percentage of occupancy for those establishments.

For example, an 80 unit commercial office building currently has 60 units occupied. Therefore, the occupancy ratio is 60/80 or 75%. Similarly, in an apartment building with 40 units out of which 36 are occupied, the occupancy rate is 36/40 or 90%. The vacancy rate or vacancy ratio is the number of units still available in those buildings, or the opposing number, 40/80, and 4/40 in the examples above.

Occupancy Rates for Real Estate Investors

Occupancy rates or the occupancy ratio are important for real estate investors to indicate how profitable the investment would be for them. A residential real estate investor looking to invest in a rental property with multiple units at its disposal is interested in the occupancy rate. They could look at other rental properties in the area or at that rental property if it was used before for that purpose as it will tell them what cash flow he/she can expect from the investment.

A rental property that only has a 20% occupancy ratio will either require big financial investments or may experience a low occupancy rate because of external factors that can not be changed by one investor. A rental property like this may require more costs from the investor than it might bring back in profit. Additional time might be spent on finding tenants, and there’s always the risk that they might be unable to fill all the units available.

Property taxes and maintenance costs will continue to come regardless of occupancy ratio or vacancy rates.

Occupancy Ratio for the Real Estate Market

Those residential or commercial developments like malls depend on the occupancy ratio when it comes to the price of the property and the value for which they sell. If you take two malls where one has an occupancy rate of 90%, and the other falls short at 35%, the mall with a 90% occupancy rate will sell for a higher price than a low occupancy rate. The low occupancy ratio can indicate something wrong with the property, like its location, its amenities, its flow of customers or rentals, or its management. All these factors have to be considered by real estate developers as it will influence their cash flow once they purchase the property.