Definition
Physical occupancy is the percentage of a property’s total units that are currently leased or occupied.
It measures how many units are filled — not how much rent is actually collected.
Formula
- Physical Occupancy = Occupied Units ÷ Total Units
Example:
- 100 total units
- 92 units leased
- Physical occupancy = 92%
What It Tells You
- Leasing demand strength
- Turnover levels
- Lease-up progress
- Market competitiveness
What It Does Not Tell You
- Whether tenants are paying on time
- How many concessions are being offered
- True income performance
That is why investors also analyze economic occupancy.
Physical vs. Economic Occupancy
- Physical Occupancy: % of units filled.
- Economic Occupancy: % of rent collected versus potential rent.
A property can show 95% physical occupancy but only 88% economic occupancy if:
- Tenants receive free rent concessions
- Bad debt is elevated
- Collection issues persist
Impact on Underwriting
Physical occupancy helps determine stabilized vacancy assumptions used to calculate Gross Operating Income (GOI) and ultimately Net Operating Income (NOI).
However, underwriting solely on physical occupancy can overstate value if income leakage is ignored.
Lease-Up vs. Stabilized Occupancy
- Lease-Up Phase: Occupancy is growing toward stabilization.
- Stabilized Occupancy: Typically 90–95%+ depending on market norms.
Stabilization thresholds vary by asset class, submarket, and lender standards.
Common Pitfalls
- Confusing leased units with occupied units.
- Ignoring units offline for renovation.
- Assuming high occupancy equals strong cash flow.
- Failing to adjust for heavy concession environments.
Investor Checklist
- Review current rent roll.
- Compare physical occupancy to economic occupancy.
- Analyze turnover trends.
- Evaluate lease expirations and rollover risk.
- Confirm units offline for renovation are properly categorized.