Three occupancy figures sit in every rent roll, and the one in the marketing deck is usually the one that pays the least.
Physical occupancy is leased area divided by total area; economic occupancy is rent actually collected divided by gross potential rent, the rent the building would earn fully let at market. On an illustrative 100,000 sq ft office, 87.0 per cent of the space is leased but economic occupancy is only 54.6 per cent: $2,184,000 collected against $4,000,000 of potential rent.
Worked in full in Real Estate Fund Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The two numbers answer different questions. Physical occupancy tells you how much of the building has a tenant on paper. Economic occupancy tells you how much of the building's earning power is turning into cash. Between them sits a third figure, operating occupancy, the share of the space where a tenant is actually in and trading. A fund that reports the first and services its debt from the third will find out the difference at the first covenant test.
| Unit | Status | Area, sq ft | Contract rent, $/sq ft | Rent received |
|---|---|---|---|---|
| A | Leased, trading | 30,000 | 36.00 | 1,080,000 |
| B | Leased, trading, 6 months rent-free | 20,000 | 40.00 | 400,000 |
| C | Leased, not yet commenced | 15,000 | 40.00 | 0 |
| D | Leased, trading, half in arrears | 10,000 | 40.00 | 200,000 |
| E | Leased, trading | 12,000 | 42.00 | 504,000 |
| F | Vacant | 13,000 | 0 | |
| Total | 100,000 | 2,184,000 |
Gross potential rent is the whole building at market: 100,000 × $40.00 = $4,000,000. That is the denominator for economic occupancy, and it is deliberately a market figure rather than a contract one, so that below-market leases show up as a cost.
Physical (leased) occupancy = leased area ÷ total area
Operating occupancy = area occupied and trading ÷ total area
Economic occupancy = rent collected ÷ gross potential rent at market
In Excel, with area in column C, status flags in D and rent received in F: =SUMIFS(C:C,D:D,"Leased*")/SUM(C:C) for physical occupancy and =SUM(F:F)/(SUM(C:C)*Market) for economic occupancy.
The useful output is not the ratio but the bridge that explains it. Every dollar between gross potential rent and collected rent belongs to one of five lines, and the lines behave very differently over time.
| Line | Amount | % of GPR |
|---|---|---|
| Gross potential rent at market | 4,000,000 | 100.0% |
| Loss to lease (A at $36, offset by E at $42) | −96,000 | −2.4% |
| Vacancy loss (F) | −520,000 | −13.0% |
| Leased, not yet commenced (C) | −600,000 | −15.0% |
| Concessions: rent-free (B) | −400,000 | −10.0% |
| Bad debt and arrears (D) | −200,000 | −5.0% |
| Rent collected | 2,184,000 | 54.6% |
Loss to lease nets two tenants: unit A pays $4.00 below market on 30,000 sq ft, −$120,000, and unit E pays $2.00 above market on 12,000 sq ft, +$24,000. Only the vacancy line, 13.0 per cent, is captured by physical occupancy. The whole 32.4-point gap between 87.0 and 54.6 per cent sits inside space the rent roll calls leased: loss to lease, the uncommenced lease, the rent-free and the arrears.
The test of the bridge. It must close to the dollar: 4,000,000 − 96,000 − 520,000 − 600,000 − 400,000 − 200,000 = 2,184,000. If it does not, a unit is being counted twice, typically a rent-free tenant booked both as a concession and as vacancy.
| Case | Added | Rent collected | Economic occupancy |
|---|---|---|---|
| Base year | 2,184,000 | 54.6% | |
| C commences, alone | 600,000 | 2,784,000 | 69.6% |
| B's rent-free ends, alone | 400,000 | 2,584,000 | 64.6% |
| D pays in full, alone | 200,000 | 2,384,000 | 59.6% |
| All three | 3,384,000 | 84.6% | |
| All three, and F let at market | 520,000 | 3,904,000 | 97.6% |
Two points stand out. First, $1,000,000 of the gap, the commencement and the rent-free, burns off on its own if nothing goes wrong: it is a timing item, not a performance one. Second, even with every leased tenant paying in full, economic occupancy reaches 84.6 per cent, not the 87.0 per cent that physical occupancy implies, because unit A's below-market lease is permanent until it expires. A fully let building tops out at 97.6 per cent for the same reason.
The common mistake runs in both directions. The first is to multiply leased occupancy by gross potential rent and call it income: 87.0 per cent of $4,000,000 is $3,480,000, which overstates this year's cash by $1,296,000, or 59.3 per cent. A debt service coverage ratio built on that figure is fiction for the year in which interest is actually due.
The second is the reverse: taking the depressed economic occupancy and capitalising it. Capitalised at 6.50 per cent, the temporary $1,000,000 alone is worth $15,384,615, and a buyer who prices on this year's cash and ignores the burn-off underpays by about that much. The discipline is to keep the two uses apart: economic occupancy for cash, liquidity and covenants this year; contract rent, adjusted line by line for what genuinely persists, for value. The arrears and the loss to lease, $296,000 between them, are the lines that deserve a hard look, because nothing makes them go away on a date.
The same logic sits behind the move from T-12 NOI to underwritten NOI, and the rent-free line is priced explicitly in the purchase price adjustment for a rent-free period.
Report all three figures and the bridge between them. On this building, 87.0 per cent leased, 72.0 per cent operating and 54.6 per cent economic are all correct, and a reader given only the first would misjudge the year's cash by more than half. The free workbooks for this book build a rent roll that separates leased from operating occupancy, so the gap is visible on one line rather than discovered at the quarter end.
Economic occupancy is rent actually collected divided by gross potential rent, the rent the whole building would earn if every unit were let at market. On an illustrative 100,000 sq ft office at $40 a foot, gross potential rent is $4,000,000; with $2,184,000 collected, economic occupancy is 54.6 per cent, against 87.0 per cent of the space leased.
Because a signed lease is not cash. Leased space can be below market, not yet commenced, inside a rent-free period or in arrears. On the illustrative building those four items cost $1,296,000 against leased occupancy times gross potential rent, which is why 87.0 per cent leased becomes 54.6 per cent economic.
For debt service and cash this year, economic occupancy, because only collected rent pays interest. For value, neither raw figure: a valuer should start from contract rent and treat burn-off items separately. On the illustrative case $1,000,000 of the gap is temporary, and capitalising it at 6.50 per cent would misstate value by $15,384,615.
This article is one calculation from Real Estate Fund Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 453 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.