Physical vs. economic occupancy in self storage

The three definitions

Inside Self Storage's 2022 explainer by Scott Krone of Coda Management Group sets out the three standard measures, and the definitions below follow it.

Physical (unit) occupancy

“The number of occupied units at a self-storage property, expressed as a percentage.” A 100-unit facility with 75 units rented is 75% occupied. It is the easiest of the three to count, and when the vacancies are in large units it is also the highest.

Square-foot occupancy

“The number of occupied, rentable square feet at a facility, also expressed as a percentage.” It weights each unit by its size, so a vacant 10x30 counts twelve times as much as a vacant 5x5.

Economic occupancy

“The percentage of gross potential income being received from available self-storage units.” Krone's version compares “the maximum market rate that could be charged for each space” with the rent actually collected, so it reflects vacancy, discounts and collections together, and Krone calls it the most significant of the three when evaluating an existing business.

Economic occupancy against what?

The numerator is not controversial: rent actually collected. The denominator is where people differ. “Gross potential rent” can mean every unit at its current in-place rent, every unit at today's street rate, or every unit at market rent. The three produce different answers from the same facility, and a quoted economic occupancy is meaningless until you know which one was used.

• Against in-place GPR (all units at the rents current tenants pay) the number isolates vacancy and collections. It answers: how much of the rent roll's own potential is turning into cash?
• Against market or street potential (all units at the rate you could charge today) the number also captures loss to lease. It answers: how much of the facility's earning power is being used? This is the version Krone describes.

The rent roll analyzer on this site shows both, side by side:

Scheduled rent is occupied units times in-place rent. Collection loss is your estimate of concessions and bad debt as a percentage of revenue. Both measures cover rental income only. The break-even occupancy calculator reports today's economic occupancy on the in-place basis with other income included in both the numerator and the denominator, so that it can be compared directly with the break-even figure.

Worked example: 88% occupied, 63% collected

Suppose a 360-unit facility is full on its small units and mostly empty on its large ones. The rents shown are what current tenants pay, net of any permanent discount. All figures are hypothetical.

Now add collections. Several tenants are months behind, and the seller runs a first-month-free promotion that the rent roll does not show. Together these are estimated at 6% of scheduled rent. For scale, Scott Lewis's 2019 Inside Self Storage article on occupancy types shows that a first-month-free offer on a $100 unit costs that unit about 8% of a year's rent: 11 of 12 months collected, or 91.7%.

Four numbers, one facility: 87.8%, 70.1%, 72.8% and 62.8%. The 44 vacant units are 12.2% of the units but 29.9% of the square feet, because 37 of them are 10x20s and 10x30s. A seller quoting “88% occupied” is telling the truth, and it is still the least useful of the four numbers.

Where the gap goes

Measured against market potential, every dollar the facility does not collect falls into one of three buckets:

Each bucket needs a different fix, and each carries a different risk:

• Vacancy is concentrated in large units. Before you underwrite filling them, check whether the market wants 10x20s and 10x30s at those rents. The answer might be a lower rate, a longer lease-up, or converting some of the space to smaller units.
• Loss to lease is closed through street-rate changes on new tenants and rate increases on existing ones, at the risk of move-outs. The value-add guide walks through that step.
• Collection loss can be the cheapest to fix and the easiest to overstate. A delinquency report that shows the same tenants 90 days behind month after month may point to a lien-and-auction process that is not being followed.

Why lenders and buyers care

Value and loan size both come from net operating income, and NOI is built from collected income, not rented units. Krone's article describes the three measures together as giving a lender or investor “a concise snapshot of how the facility is doing,” and the reason the snapshot needs all three is that each one can hide a problem the others reveal:

• High unit occupancy, low economic occupancy can mean rents are below market (an opportunity if you can prove the market) or that delinquent tenants are being carried as occupied (a problem that will show up as move-outs and auctions after closing).
• High unit occupancy, low square-foot occupancy means the vacant space is in large units. Lease-up plans that assume those units will fill at the same pace as small ones deserve scrutiny.
• Economic occupancy near break-even leaves little room for debt service. Compare today's economic occupancy with the break-even figure from the break-even occupancy calculator; the difference is your cushion.

The trend says more than the level

One month's numbers can mislead. Compute unit occupancy and economic occupancy for each month of the T12 and look at how they move together. If unit occupancy rose from 80% to 88% over the year while economic occupancy stayed flat, the seller probably filled units with discounts, or the new tenants are not paying, or both. That kind of occupancy tends to leave as easily as it arrived. If economic occupancy rose faster than unit occupancy, rents or collections improved, which is harder to fake and more likely to hold after closing.

Seasonality matters too. Compare the same months year over year if the seller can provide 24 months, and be wary of a sale timed to a seasonal peak in unit occupancy.

Lender requirements differ, so ask each lender how it measures occupancy and which trailing period it uses before you rely on a number in your financing plan. The self-storage loans guide covers how loans are sized.

Lewis makes a related point from the operator's side: high physical occupancy does not mean a facility is producing the most revenue it could, and when a manager brags about 100% occupancy, Lewis reads it as a sign that revenue is not being maximized. For a buyer, that is the same signal read from the other direction.

Measuring it from seller documents

1. Rent roll. Build the unit mix: count, occupied units, in-place rent per size, and square feet per unit. That gives unit occupancy, square-foot occupancy and scheduled rent. The T12 and rent roll guide covers how to reconcile the two.
2. Delinquency report. Count occupied units that are more than 30 and more than 60 days past due, and their balances. Decide whether each is likely to pay or likely to go to auction.
3. T12 and bank deposits. Compare twelve months of scheduled rent from the rent roll with rental income in the T12 and with deposits. The shortfall, net of timing differences, is your evidence for collection loss.
4. Market survey. Price each unit size at what comparable facilities achieve for their occupied units, not just their advertised street rates, to get market potential.
5. Compute both economic measures in the rent roll analyzer, and write down which basis any number in your memo uses.

These are underwriting estimates. The actual numbers depend on how the seller records discounts, write-offs and fees, which is one more reason to reconcile the rent roll to deposits before you rely on any of them.

This guide is general education about self-storage underwriting, not investment, lending, tax or legal advice. Figures from third-party reports are cited with their dates and change over time.