Operations: MHN discovers (but does not identify) Economic Occupancy
Posted: July 10th, 2009 | Author: mfguide | Filed under: Multi-Family, Operations | Tags: Multi-Family, Operations | 2 Comments »Multi-Housing News recently advised that owners need to be aware of “Trade-Off Between Cash Flow and Occupancies“. In other words, MHN just discovered economic occupancy.
“It is a tradeoff between cash flow and occupancies and owners need to address that,” Brad Dillman, quantitative analyst at PPR, tells MHN. “The decision depends on the specifics of the owners situation, the property itself and if there is a minimum occupancy level that needs to be maintained in the loan contract etc.”
While I know that physical occupancy is what drives most property managers because it many owners want a single variable to evaluate property performance, physical occupancy has limited importance in financial analysis. Much more important is economic occupancy, which, similarly to a hotel’s RevPAR, describes the financial efficiency of the actual revenues as a percentage of the Gross Potential Rent (Formula: Net Rental Income/GPR).
I’m not sure what happened with this piece, but either it doesn’t say what it was supposed to, or it’s introducing us to something that everyone should already. know: when conducting analysis of income properties, Economic Occupancy > Physical Occupancy.
[Note: My operating presumption is that when a property approaches 95% occupancy, rents need to climb. If your property is 100% occupied, rents are too low.]
Will,
Good to see you restoring some old school sensibilities in the real estate world. This post cracked me up in a way, because you are right — it is extremely self-deceiving, and economically dangerous, to be overfocused on an apt property’s physical occupancy, as opposed to its economic, which tells the real story.
And your “operating presumption” about 95% occupancy and rents climbing jives with my experience.
Lisa:
Thanks for the comment and the recognition that economic occupancy is a fundamental calculation for real estate valuation and management.
I thank my asset management mentors, both ex-Archon, for constantly reiterating the centrality of financial stability in multifamily.