What Is an Occupancy Rate?

Mary McMahon

An occupancy rate is a reflection of the number of available units in a housing community, hotel, commercial building, or similar environment that are occupied by tenants. High rates are preferable, as they indicate that most units are occupied and generating income. A low rate can be a sign of problems like excessively high rents, a poor economy, or lack of interest in a particular area. The occupancy rate is usually expressed as a percentage.

If the occupancy rate for commercial real estate is already low, a developer might not want to work on a new commercial development because there wouldn't be enough interest from potential renters.
If the occupancy rate for commercial real estate is already low, a developer might not want to work on a new commercial development because there wouldn't be enough interest from potential renters.

To calculate an occupancy rate, it is necessary to determine the number of available units. In a setting like a hotel, some units might not be available because they are under repair or construction, or are blocked out for other reasons. Thus, a building with 100 rooms might have only 93 available, as seven are not ready for use by customers. With this information in hand, it is possible to determine how many rooms are in use to generate an occupancy rate.

Apartment building occupancy rates are among factors used to gauge the health of a real estate market.
Apartment building occupancy rates are among factors used to gauge the health of a real estate market.

A 100% occupancy rate can be unusual, except for settings like hotels during busy holiday weekends. It is possible to look at rates for the hotel industry in an area as a whole, not just a single hotel. Analysts can also look at available commercial real estate, apartments, or single-family homes to gauge the health of the real estate market. Much of this information is publicly available through records maintained by government agencies.

Developers consider the occupancy rate when they work on new projects. If the rate for commercial real estate is already low, for example, a developer might not want to work on a new commercial development, because there wouldn't be enough interest. Conversely, if hotels operate at close to 100% occupancy rates routinely, there is room in the market for another hotel, and the developer might look at specific breakdowns to see if particular locations or amenities are more likely to result in high usage.

Governments must think about this when reviewing proposals for public housing and other initiatives. They can also consider it when developers submit applications for projects. If a developer wants to propose 500 new housing units, for example, and the occupancy rate for housing in the region is at 40%, a planning commission might turn it down on the grounds that more housing is clearly not necessary. Government agencies might also be interested in promoting economic activity by addressing vacant buildings with promotions like giving incentives to landlords who remodel to make buildings more appealing or reduce rent to get tenants established in their buildings.

Hotels may have a 100% occupancy rate during peak season and holiday weekends.
Hotels may have a 100% occupancy rate during peak season and holiday weekends.

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