# Occupancy Rate

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## What is occupancy rate?

A ratio expressing rented space as a proportion to the total available space is occupancy rate. Analysts use occupancy rates to understand the performance of businesses providing housing facilities or for hospital beds occupied. It shows how much of the available space is in use or generating revenue.

Highlights
• It is a ratio showing occupied space as a proportion to the total available space.
• It is often used as a KPI by real estate companies, hotels, hospitals, and passenger transport operators.
• The occupancy rate is generally used as a base by analysts to predict the income stream. Management uses it to set revenue models.

How is occupancy rate computed?

The occupancy rate is computed using the following simple formula:

The resultant is very useful in determining current revenues for real estate and property businesses. It is also a metric commonly visible in the hospitality sector’s annual reports.

The following steps help determine the occupancy rate-

• Firstly, the count of total units available to be occupied is to be determined.
• Next, the count of occupied units is finalised.
• It is then divided by the count of the total available units.

Example-

To understand what occupancy rate means, let’s take a simple example.

Suppose there are 50 houses in a residential complex; tenants occupy 20 out of them. So, the occupancy rate would be (20/50) x100, i.e. 40%.

Similarly, if in the next month the number of tenants moving in goes up. Then, the occupancy rate will increase. Say 10 more houses got occupied due to favourable surroundings, the occupancy rate of the residential complex will go up to 60%.

The vacancy rate is the exact opposite of it. The vacancy rate is the percentage of all available units, which means the number of houses remaining in the residential complex.

## What does the occupancy rate tell?

A high occupancy rate is typically a sign that real estate properties are not being used to their full potential. The metric is a clear indication of how the company is performing and what are its expected cash-flows. A real estate investor can quickly get a hold of his earnings then.

The occupancy rate is generally used as a base by analysts to predict the income stream. Therefore, it is an essential metric for forecasting and valuation. If an investor is interested in buying an entire shopping mall or a real estate company wants to attract institutional investors, they need to keep occupancy intact.