Economic Occupancy and Physical Occupancy in Self-Storage
When evaluating the performance of a self-storage facility, two critical metrics often come into play: economic occupancy and physical occupancy. While both provide insights into the property’s usage and revenue potential, they measure different aspects of the business. Understanding the distinction between these metrics is essential for making informed investment decisions and managing operations effectively.
Physical Occupancy
Physical occupancy is the straightforward measure of how much of the storage space is currently rented out. It is calculated by dividing the number of rented units by the total number of units available and is usually expressed as a percentage. For instance, if a self-storage facility has 100 units and 90 of them are occupied, the physical occupancy rate would be 90%.
Calculation:
Physical Occupancy = Number of Occupied Units / Total Number of Units ×100
Physical occupancy provides a snapshot of the demand for storage units in a given market. A high physical occupancy rate typically indicates strong demand, while a low rate may suggest a need for better marketing or competitive pricing.
Economic Occupancy
Economic occupancy, on the other hand, reflects the revenue performance of the facility relative to its potential. It measures the percentage of the gross potential income that is actually collected. This metric considers not just the number of units rented but also the rental rates and any concessions or discounts offered.
Calculation:
Economic Occupancy = Actual Rental Income / Gross Potential Rental Income ×100
For example, if a facility has the potential to generate $10,000 per month at full rental rates but only collects $8,000 due to discounts or vacant units, the economic occupancy rate would be 80%.
Key Differences
- Focus: Physical occupancy is purely a measure of space utilization, while economic occupancy focuses on income generation.
- Revenue Impact: Economic occupancy gives a better picture of financial health, as it accounts for rental rates and discounts. A facility can have high physical occupancy but low economic occupancy if many units are rented at reduced rates.
- Operational Insight: Physical occupancy is useful for assessing demand and capacity, whereas economic occupancy helps in understanding the revenue efficiency and pricing strategy effectiveness.
Importance for Investors
For investors, both metrics are important but serve different purposes. High physical occupancy may indicate that a property is well-located and in demand, but without strong economic occupancy, it may not be generating the expected income. Conversely, a property with lower physical occupancy but high economic occupancy could be maximizing its revenue from fewer, higher-paying tenants.
Strategies to Improve Both Metrics
- Dynamic Pricing: Adjust rental rates based on demand to balance both occupancy rates.
- Effective Marketing: Target marketing campaigns to attract more tenants and boost physical occupancy.
- Revenue Management: Offer value-added services and products to increase income without necessarily increasing occupancy.
Understanding the difference between economic and physical occupancy is crucial for managing a self-storage facility effectively. While physical occupancy provides a quick look at how well the space is utilized, economic occupancy offers deeper insights into the financial performance. Balancing both can lead to optimized operations and improved profitability, making these metrics key tools for any self-storage operator or investor.
Interested in self-storage investments in Arizona? Reach out to VandeWeerd Commercial today!
Disclaimer: The information provided in this article is for educational and informational purposes only. It is not intended to be, nor should it be construed as, financial, legal, or investment advice. Readers are advised to consult with qualified professionals, such as financial advisors, attorneys, and/or real estate experts, before making any financial decisions or entering into any commercial real estate transactions. The author and publisher of this post make no representations or warranties regarding the accuracy, completeness, or suitability of the information provided herein. The use of this information is at the reader’s own risk.
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