Understanding Physical and Economic Occupancy
Occupancy is the number of units that are occupied over a period of time. Then, this number is converted to a percentage letting you know “how full is your facility”. Conversely, vacancy represents “how empty is your facility”.
As an example, a 100-unit facility with 10 unoccupied units has 90% occupancy rate and a 10% vacancy rate. It seems simple enough on the surface, but to truly understand how well your facility is performing we need to go beyond physical occupancy and investigate economic vacancy.
Physical occupancy
As shown in the example above, physical occupancy are units with items stored in them which includes tenants paying their rent on time as well as delinquent tenants. The major problem with physical occupancy is that it does not distinguish between income generating and non-income generating units.
It is important to remember that achieving 100% physical occupancy is not the goal. In fact, multiple issues can arise because it does not allow you to maximize your potential revenue impacting operating income and property value.
Taking a closer look at the vacant units, you want to identify why they are empty and determine if you have “full” units that are not generating income. Truly vacant units are available for rent. Using the example above for the 100-unit facility, in addition to the 10 available for rent units there are 3 units with delinquent tenants, 2 units storing items for the owner, and 6 units receiving a first month free incentive. Although the property is 90% physically occupied calculating the economic occupancy, tells a different story.
10% (available) + 3% (delinquent) + 2% (“unrentable”) + 6% (incentives) =
79% Economic Occupancy
Understanding “full” does not equal income generating is the first step in putting economic occupancy to work for you. Well-run facilities have 90-95% economic occupancy.
Impact on Value
Economic occupancy represents how much money is being left on the table. It shows if you are effectively achieving your gross potential income and reflects how well a property is being managed. When a facility has a low economic occupancy, it tells investors and lenders that the property is less valuable.
The best way to improve economic occupancy and increase property value is done by managing occupancy.
Managing Occupancy
Individually assessing the source of the vacancy is a good place to start. When looking at your units avoid the idea that full is better and raising rents should be avoided. Tenants who pay market rates will generate more income and allow you to budget and plan for capital improvements. Be strategic with incentives, it can be tempting to offer the first month free, but too many incentives can create an immediate loss that cannot always be recovered. We all know turnover can’t be avoided, but having a well-managed website can generate leads and lessen the effects of turnover. Looking at any unrentable units you currently have and determining what is needed to make them rentable can uncover additional revenue with little output. Ongoing oversight and assessment are the keys to success when addressing occupancy.
Advantages of Third-Party Management
Experienced management companies have perfected the art of running a successful property.
- They understand when and how to use incentives.
- The markets rates for your location(s).
- How to recover delinquent payments.
- Converting unavailable units to available.
Outsourcing management allows owners to have more control over how their facility performs. Issues are handed off to the management company to address and owners can benefit from increased operating income without the hassle of management.
One of the most compelling arguments for third-party management is found in how management companies are paid. When your operating income increases, their management fee increases. This makes third-party managers highly motivated to run your facility as efficiently and effectively as possible.
Other Benefits of Third-Party Management:
- Reduced cost on shared services
- Revenue management and pricing guidance
- Recruiting, staffing, training, & retention of quality staff
- Access to data for informed decision making
- Professional services, compliance, and financial reporting
Summary
Economic occupancy is an effective way to measure the success of your business. Examining empty units as well as non-income generating units can increase your operating income and overall property value. Using strategies to recover delinquent rents, create a funnel of new leads, and adjust rates to market are all ways to address a low economic occupancy.
If you are interested in seeing how third-party management can improve your economic occupancy and the overall value of your facility, please request a PRO Forma or Contact Us to learn more.