Economic occupancy is the rent a property actually collects, divided by the rent it would collect if every unit were leased and paying in full. Physical occupancy only counts occupied units. Because economic occupancy measures dollars, it also captures free rent, concessions and unpaid rent.
Formula
Economic occupancy = Rent collected / Gross potential rent
Physical occupancy = Occupied units / Total units
Worked example
A 120-unit apartment property has 113 units occupied. Average rent is $1,500 per unit per month, so gross potential rent is $2,160,000 a year. The T12 shows $129,600 lost to vacancy and unpaid rent.
Physical occupancy = 113 / 120 = 94.2%
Economic occupancy = ($2,160,000 − $129,600) / $2,160,000 = 94.0%
The two figures are close, which is what you’d expect from a stable building.
Now suppose the same building gave one month free on 30 new leases, which costs $45,000 (30 × $1,500). It also wrote off $20,000 of unpaid rent. The same 113 units are occupied, so physical occupancy is still 94.2%. But collected rent drops to $1,965,400, and economic occupancy falls to 91.0%. The OM will usually report the 94.2%.
What it means in practice
When economic occupancy runs more than a few points below physical occupancy, the property is losing income that a unit count won’t show. The usual causes are heavy concessions to fill units or tenants who aren’t paying. That’s why lenders underwrite to economic occupancy rather than physical occupancy.
For buyers, the check is simple. Calculate economic occupancy from the T12 and compare it with physical occupancy on the rent roll for the same month. If there’s a meaningful gap, ask the broker to explain it before you submit an offer, not after your investment committee asks.
Altrio makes that comparison quick. It pulls the T12 and rent roll from the broker’s email and saves both to the same deal, so you can see the two occupancy figures side by side as soon as the OM arrives.
$49 per user per month, with a 30-day free trial and no credit card required. Start free
Frequently asked questions
What is the difference between physical and economic occupancy?
Physical occupancy is the share of units or square feet that have a tenant. Economic occupancy is the share of potential rent the property actually collects. A building can be 95% physically occupied and 88% economically occupied if it’s giving away free months or carrying tenants who don’t pay.
What is a good economic occupancy rate?
It depends on the market and property type. For a stabilized apartment building, most underwriters expect economic occupancy to be within 2 to 4 points of physical occupancy. A wider gap needs an explanation.
Can economic occupancy be higher than physical occupancy?
Rarely, and only briefly. It can happen when a tenant pays a lease termination fee or when the property collects back rent from earlier months. If economic occupancy stays above physical occupancy over time, income is likely being recorded in the wrong period or category.