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In the real estate industry, the efficiency ratio refers to the ratio of leasable space to gross space of a building, expressed as a percentage.
This is a critical variable to consider in the planning phase before starting construction of the building so that the landlord would be able to maximize the amount of space that can be rented out to tenants.
This is the case for both residential and commercial buildings.
For example, a building with 180,000 square feet of space might have 10,000 square feet taken up by elevators and equipment, 3,000 square feet for a management office, 25,000 reserved for hallways and washrooms, and 7,000 for others. The remaining $135,000 square feet is the leasable area.
This can be expressed as 135,000/180,000 which equals to an efficiency ratio of 75%.
While businesses understandably want to have as high an efficiency ratio as possible, it can generally be said that the higher this ratio goes beyond 70, the more detrimental effect it would have to consumer experience. Leading to long term failure.
So it is important to seek a balance when planning the requirements and ratio of a building.
In general business, efficiency ratio measures a company’s ability to use it’s assets to generate revenue.