In my previous post, I discussed what I believe are some of the most important pros and cons of investing in self-storage real estate.
As with most real estate sectors, self-storage features some terms that are particular to this property type — specifically in how owners describe occupancy: Unit Occupancy, Physical Occupancy, and Economic Occupancy. Let’s review them:
Unit Occupancy
Unit occupancy is the most straightforward of the three. It refers to the number of occupied units at a self-storage property, expressed as a percentage of the total. For example, if a facility has 100 units and 75 of them are filled, then the unit occupancy is 75%. This metric provides a quick snapshot of the facility’s occupancy status but doesn’t account for the varying sizes of units or the revenue that’s generated by each unit.
Physical Occupancy
Physical occupancy, while similar to unit occupancy, takes into account the rentable square footage of each unit. This is the number of occupied, rentable square feet at a facility, also expressed as a percentage of the total. Physical occupancy offers what is probably a better picture of vacant vs. occupied space than unit occupancy because it considers the actual space being utilized.
Economic Occupancy
Economic occupancy compares the actual rental income being generated in relation to the gross potential rent of that property. It takes several factors into account, including turnover periods between tenants, concessions and rent incentives, and late or unpaid rent. You might think of this metric as a sort of inverse cousin to the Vacancy and Credit Allowance that you see on an APOD (Annual Property Operating Data) for a typical income property.
A 100-unit storage facility with 95 units rented has a physical unit occupancy of 95%, but its economic occupancy might be lower (and concerning) due to factors such as short-term discounts, concessions, and delinquent rent.
An Example
Let’s say we have a self-storage facility with 100 units, and we want to calculate the unit occupancy, physical occupancy, and economic occupancy for a given month.
Unit Occupancy:
Unit occupancy refers to the percentage of units that are rented out, regardless of how much of the space is being used.
At the end of the month, we find that 90 of our 100 units are rented out. So we can calculate the unit occupancy as follows:
Unit Occupancy = (Number of rented units / Total number of units) x 100
Unit Occupancy = (90 / 100) x 100
Unit Occupancy = 90%
Physical Occupancy:
Physical occupancy refers to the percentage of total rental space that is being used.
Let’s say that the average unit size in our facility is 100 square feet. That means we have a total of 10,000 square feet of rental space (100 units x 100 square feet).
At the end of the month, we find that our renters are occupying a total of 8,000 square feet of space. So we can calculate the physical occupancy as follows:
Physical Occupancy = (Total rental space in use / Total rental space) x 100
Physical Occupancy = (8,000 / 10,000) x 100
Physical Occupancy = 80%
Economic Occupancy:
Economic occupancy refers to the percentage of total potential rental income that we are actually receiving.
Let’s say that we charge an average of $100 per month for each unit. That means we have a total potential rental income of $10,000 per month (100 units x $100).
At the end of the month, we find that our renters are paying a total of $7,000 in rent (70 rented units x $100). So we can calculate the economic occupancy as follows:
Economic Occupancy = (Total rental income received / Total potential rental income) x 100
Economic Occupancy = ($7,000 / $10,000) x 100
Economic Occupancy = 70%
So in this example, we have a unit occupancy of 90%, a physical occupancy of 80%, and an economic occupancy of 70%.
Conclusion
Understanding these three types of self-storage occupancy—unit, physical, and economic—is important for investors seeking to maximize their profitability. By monitoring and managing these three types of occupancy, you can keep an eye on your business’s financial health and optimize your bottom line with informed decisions about pricing, collections, and possible expansion.
— Frank Gallinelli
FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.
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