Absorption is a metric that helps understand supply and demand in commercial real estate. Here, we take a detailed look at absorption, including a basic definition and the different types of absorption.
What Is Absorption in Commercial Real Estate?
Simply put, absorption in commercial real estate is a metric that shows the pace at which newly developed or available properties are rented, sold, or leased.
The absorption rate measures the absorption of newly developed inventory into a particular market. This rate can be influenced by several factors, including economic conditions and demographic changes in an area.
A high absorption rate means that a large number of units are being rented, sold, or leased. On the other hand, a low absorption rate means that few units are being “absorbed” into a market.
Absorption rates decrease when vacancy levels rise as landlords have few tenants for existing units. Conversely, absorption rates increase when vacancy levels fall.
Absorption can be measured for buildings or for entire markets. This is a crucial factor affecting commercial real estate as it determines the sustainability of rental properties and it may dictate what kind of development should be pursued for future projects.
Gross Absorption vs Net Absorption
There are two basic types of absorption: gross and net absorption.
Gross absorption measures the amount of space sold or leased over a given period of time without taking into account the space that was vacated during that time.
Net absorption, on the other hand, measures the space that was sold or leased, minus the space that became vacant during the same time period.
A positive net absorption rate indicates that more space is occupied than is vacated. By contrast, a negative absorption rate means that more space is vacated than occupied.
Disclaimer: This material is for general information and educational purposes only. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
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