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Net Absorption

Guide to Understanding Net Absorption

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Net Absorption

How to Calculate Net Absorption

The net absorption metric, in the context of real estate, is used to approximate the net change in tenant demand relative to supply.

The net absorption rate is the difference between 1) the occupied space and 2) the vacated space and new space (i.e. new construction) over a specified time frame.

The metric is determined by deducting the vacated square footage from the occupied square footage.

In particular, net absorption is an important metric to track in the commercial real estate market to understand the current state of supply and demand.

Calculating net absorption is a three-step process:

  1. Determine the Occupied Square Footage (i.e. Leased Space)
  2. Calculate the Unoccupied Square Footage (i.e. Vacant Space)
  3. Subtract the Unoccupied Square Footage and New Space from the Occupied Square Footage

Net Absorption Formula

The formula for calculating net absorption is as follows.

Net Absorption Formula
  • Net Absorption = Total Space Leased – Vacated Space – New Space

The figures above are typically denoted in units of square feet.

From the total leased space, the sum of square feet that became physically vacant and new space (i.e. new construction) are subtracted to determine net absorption.

Gross Absorption vs. Net Absorption

The concept of absorption in real estate is a method used to gauge tenant demand in the current market. Most often, absorption is measured in units of square footage (sq. ft).

The two primary absorption metrics are calculated on a gross and net basis:

  • Gross Absorption: The total new square footage leased by tenants over a specific period.
  • Net Absorption: The total new square footage leased by tenants, minus the square footage no longer occupied over a specific period.

While the gross absorption represents the total amount of leased space, the net absorption captures the net change in demand relative to the supply in the market.

Positive vs. Negative Net Absorption

  • Positive Net Absorption: A greater amount of space was leased compared to the amount that became available on the market, reflecting a decline in the supply of commercial space available.
  • Negative Net Absorption: A greater amount of space has become vacant and is now available on the market compared to the occupied amount, indicating the demand for commercial real estate spaces has declined relative to the supply.

Given positive net absorption, the lease prices in the market are more likely to increase, which can attract more real estate investors and developers to enter the market and more actively build new spaces to meet tenant demand.

The reverse is true for negative net absorption, as investors and developers are less likely to engage in the market in such a case since the lease prices are lower (and less profitable).

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