Also referred to as the tenant Health Ratio, Occupancy Cost Percentage represents a tenant’s total annual occupancy cost as a percentage of total annual tenant sales at the property. This metric is used by investors in retail real estate to better assess the financial health of the tenant at a given location. The lower the occupancy cost, the higher the probability the tenant will remain at the property long-term. The higher the occupancy cost, the more likely a tenant will vacate.
A healthy occupancy cost depends on the tenant type. While a healthy Occupancy Cost Percentage for a grocery tenant might be 2.5%, a similarly healthy Occupancy Cost Percentage for an apparel tenant might be 12%+. The variance in what is considered healthy largely depends on the profit margin of the products sold by the tenant. The higher the margin, the higher the occupancy cost a tenant can support.