Occupancy Rate – Everything You Need to Know
October 31, 2019
When you own rental property, you need to understand your effectiveness in reaching 100% occupancy. Anything short of full occupancy means you are leaving money on the table. Therefore, we will devote this article to a discussion of occupancy rate (OR). We’ll start by providing an occupancy rate definition and answer, “What is occupancy rate?”
Then we’ll review the occupancy rate formula, including how to calculate occupancy rate in Excel. Next, we’ll summarize rental occupancy rate by city. Finally, we’ll comment on how Assets America can help, and then answer some frequently asked questions.
What is Occupancy Rate?
In this section, we answer, “What is the occupancy rate?” The occupancy rate definition states that OR deals with the percentage of rental units actually rented. Also, the occupancy rate definition pertains to the percentage of rental space rented. Truthfully, it is a general concept, appropriate for many real estate sectors, including:
Clearly, real estate investors are vitally interested in ORs because they indicate anticipated cash flows. Additionally, it plays an important role when looking to sell or finance a property. Obviously, a property with a chronically low OR is worth less than the same property always fully occupied.
Video: Calculating Revenue per Available Room (RevPAR), Occupancy Percentage, Average Daily Rate (ADR)
How Assets America® Can Help
Assets America® can efficiently arrange financing, starting at $10 million, for construction, purchase, or renovation of rental properties. If you own a hotel or other rental property suffering from a low OR, speak to us. We can arrange funding for rehabilitation and renovation construction that can help you improve your OR long term. Call us at today 206-622-3000 or simply fill out the form below and receive a prompt response!
Low OR Properties
If you choose to buy a low occupancy rate property, you will have to make changes to boost the OR. Thus, your investment budget must account for both the purchase price and the renovation costs. You will also need to allocate money to recruiting new tenants. You’ll potentially be shelling out money for taxes, insurance, and maintenance.
Naturally, all these circumstances mitigate for a relatively low purchase price relative to comparable properties. Of course, some problems are intractable, such as a bad location.
Other problems could be amenable to correction. For example, you might be able to raise OR by adding amenities or replacing poor management. In some situations, you can repurpose an empty property and cause it to become much more valuable.
Another reason occupancy rate is significant is that it can indicate problems with an area. For example, you might not want to build a new hotel in a location surrounded by half-filled hotels. For another example, you might not want to purchase a restaurant in a sparsely occupied mall.
ORs for Hospitals
One important challenge the hospital administrators face is to balance the supply and demand of beds. Clearly, a trend of increasing bed occupancy can help justify a decision to grow the facility. On the other hand, a perennially overcrowded hospital has too much of a good thing (in this case, we specifically mean the high occupancy rate). Accordingly, they must find both short-term and long-term solutions.
Hospitals may need to track ORs by department, such as cardiac or oncology units. Of course, this kind of information can allow the hospital to redeploy spaces to reflect the community’s health problems.
Also, hospital ORs have implications for public health initiatives, construction projects, and municipal bond offerings. For instance, a new medical complex may require extensive public infrastructure commitments. Naturally, these activities would be hard to justify if nearby hospitals had low ORs.
Occupancy Rate Formula
There are two occupancy rate formula contexts:
- OR = 100 x number of rooms or units rented / number of available rooms or units.
- OR = 100 x space rented / space available.
The first formula pertains to most rental properties. The second one is appropriate when you rent out space, such as a warehouse or grain-silo space.
How to Calculate Occupancy Rate
The numerator starts with the factor of 100. This merely converts a decimal to a percentage, which is how we express OR. The number of rooms or units rented is self-explanatory. It reflects the appropriate time period. For example, hotels look at overnight OR.
An apartment building landlord may prefer to view OR as a monthly statistic. The denominator reflects the universe of rentable rooms or units. Obviously, you should exclude rooms or units that are not usable or occupied by non-paying persons. For example, rooms set aside for hotel staff do not count as rentable.
To work an example, imagine Hotel X has 103 rooms, of which three are permanently set aside for staff. On Tuesday, 92 of the rooms had paying guests. The occupancy rate is:
OR = 100 x 92 / 100 = 92%.
How to Calculate Occupancy Rate in Excel
One way to calculate OR is through an Excel grid. Let’s take our Hospital X example. In this implementation, each row represents a rentable room. Therefore, there are 100 rows. Each column is a day of the month, so there are 31 columns. Each grid cell is the intersection of room number and date. The cell can take on a value of 0 for vacant, 1 for occupied.
Then you can add sub-total cells to get totals by date for all rooms. Also, you get the number of occupied days for each room. Finally, you can set up cells to calculate the daily OR by dividing the day’s total by the count of room rows. You finish by multiplying the decimal by 100. You can also total the daily ORs to get the average monthly OR.
The same grid will tell you how often you rent each room. This can indicate whether your guest placement strategy is efficient. If the rooms have different rates, OR helps you adjust rental rates to boost demand for underutilized rooms. You may also be able to form judgements about popular room sizes, number, and size of beds, etc.
Rental Occupancy Rate by City
Here we present a couple of examples of rental occupancy rate by city. The first is for hotels, the second for Airbnb.
Hotel ORs for Five Major Cities
Here are the hotel average Occupancy Rate percentages for five major cities in 2017:
|
City |
Low-Priced Hotels |
High-Priced Hotels |
|
Atlanta |
67.1 |
74.1 |
|
Chicago |
64.3 |
70.8 |
|
Los Angeles |
78.4 |
81.4 |
|
New York |
87 |
86.5 |
|
Washington DC |
67.2 |
74 |
This kind of table can give you some valuable information. For example, we can see that 2017 ORs were highest in low-priced New York hotels and lowest in Chicago low-priced hotels. We also see that the city with the biggest difference between high-priced and low-priced hotels is Atlanta. In contrast, there is virtually no OR difference in New York for high-priced and low-priced hotels.
Airbnb Occupancy Rates for Eight Major Cities
Here are the average Airbnb Occupancy Rate percentages for eight major cities for the 12 months ending in July 2019:
|
City |
12-Month Average |
|
Atlanta |
36 |
|
Austin |
40 |
|
London |
42 |
|
Los Angeles |
49 |
|
New York |
47 |
|
San Francisco |
51 |
|
Sydney |
37 |
|
Toronto |
49 |
Clearly, San Francisco has OR bragging rights among this group of cities. Atlanta brings up the rear, followed closely by Sydney. New York has a relatively high Airbnb OR, which makes sense given its high hotel ORs.
Frequently Asked Questions
What is a good occupancy rate for a hotel?
Hotel News Now quotes a study that found the ideal occupancy rate for high-priced hotels is 84.6%. The same study found the ideal OR for mid-priced hotels to be 71.4%. Many factors affect individual properties, including rental prices.
What is the average occupancy rate for a hotel?
In mid-2018, the average occupancy rate for a hotel was 66.1%. That was up from 61.1% for the previous 12-month period. Logically, the average OR makes sense in terms of trends rather than actual values. Clearly, local variables can greatly impact hotel ORs.
How do I to calculate occupancy rate for a hospital?
The calculation is 100 x number of inpatient days for period / available beds x number of days in period. Once again, this number is best for tracking trends over time and comparing different hospitals.
What is the average occupancy rate of Airbnb?
For 2018, the average OR for Airbnb properties was 48% nationwide. The number doesn’t distinguish between full-time and part-time properties. Some cities had exceptionally low OR percentages, in the range of 10% to 20%. Of course, the average varies by city.
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