What is Occupancy Cost?
The total cost of occupying a retail space expressed as a percentage of gross sales.
Definition
Occupancy cost ratio is the primary financial metric used to evaluate whether a retail lease is sustainable. It is calculated as total occupancy cost (base rent + NNN/CAM charges + percentage rent) divided by gross sales. Industry benchmarks vary by retail category: fast food typically targets 6-8%, full-service restaurants 8-10%, and specialty retail 10-15%. An occupancy cost above the category benchmark signals that the tenant may face margin pressure, especially during sales downturns. Occupancy cost analysis is essential for both tenant representation (ensuring a client isn't overpaying) and landlord advisory (setting rents that tenants can sustain). The metric also enables cross-market comparison — a $50/SF rent in Manhattan may represent a lower occupancy cost than a $25/SF rent in a smaller market if the Manhattan location generates proportionally higher sales.
Example
A retail tenant with $500/SF in annual sales and total occupancy costs of $40/SF has an occupancy cost ratio of 8%, which is within the healthy range for most retail categories.
Related Terms
Learn more about occupancy cost in practice
Retail Benchmarks