Physical vs Economic Occupancy
StoragePRO Management, Inc
Physical vs Economic Occupancy:
Breaking it Down with StoragePRO Management
Occupancy is defined as the number of units that are occupied over a period of time. This number is then converted to a percentage. As an example, a 100-unit facility with 10 unoccupied units results in a 10% vacancy and therefore has 90% occupancy. In order to understand occupancy, we need to take a look at both physical and economic vacancy.
Physical vacancy is determined by the units that are currently empty and not generating income over a specified length of time. Assuming we use 12 months, let’s say that during the first 6 months of the year 10 units were unrented but in the second 6 months of the year, only 5 were unrented. For the year, physical occupancy would be 5%. It is important to remember that 100% physical occupancy is not the goal. In fact, there are multiple issues that can arise from facilities with 100% physical occupancy. The most significant problem with having 100% physical occupancy is that it does not allow potential revenue to be maximized.
Economic vacancy is the difference between the actual rental income and the gross potential rental income. Gross potential rent is considered the maximum amount of rent an owner or investor can expect during a specified time period. Economic vacancy goes beyond if the unit is occupied and takes into account tenants that have not paid, units that are “unrentable” (used by manager or company storage), turnover periods between renters, and incentives (1st first month).
Using the same 100-unit example, let’s change some of the parameters and calculate economic occupancy. There are 5 unrented/available units, 3 tenants who have not paid rent, 1 unit used rent-free by the manager, and 10 units receiving an incentive. To calculate the current economic vacancy, you would use the formula below:
5% (unrented) + 3% (unpaid rent) +1% (“unrentable”) + 10% (incentives) =
19% Economic Vacancy or 81% Economic Occupancy
Although this property is 95% physically occupied you can see that economic occupancy tells a different story. It is vital to understand the difference between the two calculations and more importantly how they impact the overall value of your facility. True value is seen in economic occupancy, and a well-run facility has 90% economic occupancy.
Impact on Value
Economic vacancy influences the value of a facility because it directly impacts the amount of potential rental income a facility can generate. The most common reasons for economic vacancy are empty units, incentives to new renters, turnover periods between renters, and unrentable units. Because economic vacancy represents gross potential income it has a direct relationship with the value of the facility. It is difficult for investors to justify their ROI when a facility has low economic occupancy, specifically with lenders.
By looking at each of the reasons for economic vacancy individually, owners can see opportunities to improve their economic occupancy and property value.
Individually assessing the source of the vacancy is a good place to start. When looking at empty units avoid the idea that it is better to have them full. Waiting for tenants who are willing to pay market rates will always generate more returns. This leads to how to handle incentives. Although it can be tempting to offer the first month free or various other incentives, they often put you at an immediate loss that cannot always be recovered. Turnover cannot be avoided, but a strong digital approach including a well-managed website can lessen the effects of turnover rate. Lastly, take a hard look at any unrentable units you currently have and address them.
Proper management is the key to success with both physical and economic occupancy. Some of the services offered by management companies that have proven to be successful are facility maintenance & aesthetics, digital lead sourcing & marketing, website management, business intelligence, revenue management, human resources, and accounting. Although the initial may be to resist the management fee, owners who have chosen to outsource their facility to a third-party manager experience long-term return on investment while still maintaining ownership.
Advantages of Third-Party Management
Experienced management companies have perfected the art of running a successful property. They understand promotion, rental rates, vacancies, staffing, and maintaining both the physical and digital presence of the property. Further outsourcing management, allows owners to have more control over the facility. Ownership remains intact and issues are handed off to the management company. Areas of concern are now their job to address and owners can enjoy owning but not managing their facility.
Possibly one of the most compelling reasons to consider management is because of how management companies are paid. Most companies will charge a percentage of the monthly rental income. This makes them highly motivated to run your facility as efficiently and effectively as possible.
In order to address occupancy an analysis of the economic occupancy will identify areas of improvement. Obtaining 90% EO is the objective, although anything above 90% is considered ideal.
Again, we will use a 100-unit facility. Currently, there are 3 units being used internally by the manager/owner, 16 receiving an incentive, and none that are physically vacant. The economic occupancy in this example is:
3% (“unrentable”) + 16% (incentives) + 0% (unrented) =
19% Economic Vacancy or 81% Economic Occupancy
In this example, incentives are impacting economic occupancy causing it to be lower than 90% even with no unrented units. Although the complexities of your facility will likely be more difficult than the example above, analyzing vacancies from an economic perspective is necessary to maximize income.
After the factors impacting economic occupancy have been identified, comparing these with services provided by professional management allows for the best financial decision to be made.
Consider the chart below when preparing to make a decision.
By allowing a third-party manager to handle the day-to-day operations of a facility, owners are able to enjoy reduced costs while maximizing gross potential income. Management companies allow owners to leverage the company’s size and resources to benefit their facility’s profits.
Benefits of Third-Party Management:
Branding through signage, website, internet searches, and SEO’s
Sharing amenities for example a call center
Revenue management to determine rental rates and provide pricing guidance
Human resources and staffing
Additional professional services such as legal counsel and IT
The most important takeaway is that economic occupancy measures the success of your business. Even if your facility is not currently at 90% economic occupancy, there are many strategies that can be employed to get it there.
If you are interested in seeing how third-party management can improve your economic occupancy and the overall value of your facility, please request a PRO Forma or Contact Us to learn more about StoragePRO Management.