What it is:
Occupancy rate is the ratio of rental units rented versus the total number in the building, city, state, etc.
How it works (Example):
The formula for occupancy rate is:
Occupancy Rate = Units Rented Out / Total Units
For example, let's assume that Company XYZ owns an apartment building that has 300 units. Of those units, 275 are rented out. Using this information and the formula above, we can calculate that Company XYZ's occupancy rate is:
Occupancy Rate = 275/300 = 91.67%
Though our example uses units as the basis for calculating occupancy rate, it is also possible to use square feet or rent dollars instead.
The vacancy rate is equal to 1 - Occupancy Rate. In our example, the vacancy rate would equal 1 - 0.9167 = 8.3%
Why it Matters:
From a real estate investor's standpoint, occupancy rates are predictors of cash flow, and they provide a method by which the financial attractiveness and performance of various parcels of real estate can be compared. Clearly, investors like to see high occupancy rates. Low occupancy rates can indicate that a piece of real estate has a problem.