Physical occupancy is the percentage of a property's units that are occupied by tenants, regardless of whether those tenants are paying full rent. It is calculated as occupied units divided by total units. Physical occupancy measures how full a building is, not how much income it actually collects.
How Is Physical Occupancy Calculated?
Physical occupancy is calculated by dividing the number of occupied units by the total number of units in the property, then multiplying by 100. The formula is Physical Occupancy equals Occupied Units divided by Total Units, times 100. It counts any unit with a tenant in it, whether or not that tenant is current on rent.
Per MRI Software and HelloData, physical occupancy is a headcount metric: it answers whether a body is in the unit. It says nothing about concessions, delinquency, or below-market leases. A unit occupied by a non-paying tenant, a model unit, or an employee still counts as physically occupied.
Input | Definition |
Occupied units | Units with a tenant in place, paying or not |
Total units | All rentable units in the property |
Physical occupancy | Occupied units divided by total units, times 100 |
Physical vacancy | The inverse: 100% minus physical occupancy |
Physical occupancy can be measured by unit count or by square footage. For multifamily, unit count is standard because units are roughly comparable. For office and industrial, square footage is common because suite sizes vary widely, so one large vacant suite distorts a unit-based count.
Why Physical Occupancy Matters
Physical occupancy matters because it is the fastest read on leasing performance and demand, but on its own it overstates income. A building can be 96% physically occupied while collecting far less than 96% of potential rent once concessions, bad debt, and below-market leases are subtracted. Physical occupancy sets the ceiling; collections set the floor.
Per Willowdale Equity and industry benchmark data, stabilized multifamily properties typically target 93% to 96% physical occupancy, with economic occupancy running 2% to 5% lower. Operators watch the gap between the two: a wide spread signals concessions or delinquency eroding income even though the building looks full.
The quotable point for an operator: physical occupancy tells you the building is full, not that it is paying, and only economic occupancy tells you the latter.
Example
A 200-unit apartment property has 190 units occupied. Physical occupancy is 190 divided by 200, times 100, which equals 95%. Now compare income. Gross potential rent is $2,400,000 per year, but concessions, bad debt, and below-market leases reduce collected rent to $2,136,000. Economic occupancy tells a different story.
Metric | Calculation | Result |
Occupied units | Given | 190 |
Total units | Given | 200 |
Physical occupancy | 190 / 200 x 100 | 95% |
Gross potential rent | Given | $2,400,000 |
Collected rent | Given | $2,136,000 |
Economic occupancy | $2,136,000 / $2,400,000 x 100 | 89% |
The property is 95% physically occupied but only 89% economically occupied, a 6-point gap. That gap is $2,400,000 minus $2,136,000, or $264,000 of income the building could earn but does not, driven by concessions and delinquency. An operator who looks only at the 95% headline misses $264,000 in leakage.
Variations and Edge Cases
Physical occupancy is not a single uniform figure: what counts as occupied and how the base is measured both vary by property type and reporting convention. A leased-but-not-occupied unit, a model unit, and a down unit are each treated differently. The table covers the variants an operator should confirm.
Variant | Treatment |
Occupied vs leased | Occupied means a tenant is in place; leased may include signed but not moved in |
Unit count vs square footage | Multifamily uses unit count; office and industrial often use square footage |
Model and employee units | Physically occupied but generate no market rent, widening the economic gap |
Down or offline units | Units held off-market for renovation may be excluded from the denominator |
Non-paying tenants | Still counted as physically occupied despite delinquency |
The most common mistake is treating physical occupancy as a proxy for income. Per HelloData, a property at 97% physical occupancy with heavy concessions and bad debt might generate only 89% of its potential income. Always pair physical occupancy with economic occupancy before drawing conclusions about cash flow.
Physical Occupancy vs Economic Occupancy
Physical occupancy is often confused with economic occupancy, and both are occupancy metrics, but they measure different things. Physical occupancy is the share of units that are occupied, a headcount. Economic occupancy is the share of potential rent actually collected, a cash-flow measure. One counts bodies; the other counts dollars.
Per MRI Software, lenders and investors underwrite on economic occupancy because it drives net operating income, debt service coverage, and valuation, while physical occupancy is a leasing indicator. A stabilized property commonly shows physical occupancy 2% to 5% above economic occupancy, and a wider spread flags concessions or delinquency.
Frequently Asked Questions
How do you calculate physical occupancy?Physical occupancy is calculated by dividing occupied units by total units, then multiplying by 100. For example, 190 occupied units out of 200 total units gives a physical occupancy of 95%. It counts any unit with a tenant in place, whether or not that tenant is paying full rent.
What is a good physical occupancy rate?Stabilized multifamily properties typically target a physical occupancy of 93% to 96%, per industry benchmarks. Economic occupancy usually runs 2% to 5% lower because of concessions, bad debt, and below-market leases, so a healthy building shows a modest gap between the two figures.
What is the difference between physical and economic occupancy?Physical occupancy is the percentage of units that are occupied, a headcount metric. Economic occupancy is the percentage of potential rent actually collected, a cash-flow metric. A building can be 95% physically occupied but only 89% economically occupied once concessions and delinquency are subtracted.
Related Terms
Economic Occupancy
Vacancy Rate
Effective Gross Income
Loss to Lease
Net Operating Income