What is Physical Occupancy?
Physical Occupancy is a straightforward measure of the percentage of a property that tenants currently occupy. It is calculated by dividing the number of leased or physically occupied units by the total number of units. This metric reflects the actual presence of tenants in the property, without considering whether rent is being collected in full or on time. As such, it provides a quick snapshot of leasing success and property utilization.
For investors, physical occupancy offers an immediate gauge of market demand and leasing effectiveness. A high physical occupancy rate usually indicates strong tenant interest and stable occupancy levels, which can help support consistent cash flow. However, because it does not account for concessions, delinquencies, or bad debt, a property could appear fully occupied while earning less income than expected. This underlines the importance of comparing physical occupancy with economic occupancy to gain a complete performance picture.
In acquisition analysis, physical occupancy serves as a starting point for evaluating leasing risk. Properties with occupancy rates significantly above the market average can be seen as stable, income-producing assets, while those with lower occupancy may present turnaround opportunities. However, investors must assess whether low occupancy is due to temporary factors, such as recent repositioning, or more permanent issues like poor location or lack of amenities.
For lenders, physical occupancy is often analyzed in conjunction with economic occupancy to assess the overall strength of the asset's income stream. While a property with high physical occupancy may seem less risky, lenders are likely to investigate further to confirm that those occupied units are generating reliable rent payments.
Property managers use physical occupancy as a crucial operational metric to guide leasing strategies, marketing efforts, and retention programs. A declining occupancy rate can prompt immediate actions, such as ramping up leasing campaigns, adjusting rental rates, or improving tenant satisfaction to reduce turnover.
Brokers can leverage physical occupancy when marketing properties by highlighting strong tenant presence as a sign of stability and demand. In situations where physical occupancy is high but economic occupancy lags, brokers can propose strategies for tightening concessions and improving collections, framing the property as a value-add opportunity with clear upside potential.
Ultimately, physical occupancy provides a clear and easily understood indicator of how well a property is utilizing its available space. While it is a critical component of any performance analysis, it should be interpreted in conjunction with other metrics — particularly economic occupancy — to ensure that high tenant presence also translates into substantial and sustainable income. Together, these measures provide a more accurate view of the property's operational health and its ability to meet the performance expectations of investors and lenders.