A.CRE

Absorption

Putting Absorption in Context

Scenario: Consider a newly developed commercial district in a bustling city, which has brought to market a mix of retail and office spaces totaling 200,000 square feet. This district has attracted a variety of tenants, ranging from tech startups to established retail chains.

Contextual Analysis:

  • Gross Absorption: Over the first quarter following its launch, 50,000 square feet of space was leased to various tenants. This represents a gross absorption rate of 25%, calculated by dividing the leased space by the total available space.
  • Net Absorption: To provide a clearer picture, consider the dynamics within the same quarter. Assume that during this period, 15,000 square feet of previously occupied space in the district became vacant due to tenants moving out. Hence, the net absorption, which considers both new leases and vacancies, would be 35,000 square feet (50,000 leased minus 15,000 vacated), representing a net absorption rate of 17.5%.

Implications: The net absorption rate offers a more accurate representation of the market activity and health, showing a lesser degree of occupancy compared to the gross absorption rate, which does not account for the vacated spaces. This information is vital for property owners and investors as it influences decisions related to property improvements, marketing strategies, and pricing to enhance tenant retention and attract new renters.

Frequently Asked Questions about Absorption in Commercial Real Estate

 

Absorption refers to the amount of commercial space that is leased or occupied over a specific period. It includes both Gross Absorption and Net Absorption.

Gross Absorption is the total amount of space leased over a given period, without accounting for vacated space. In the scenario, 50,000 square feet leased in a 200,000 square foot district represents a 25% gross absorption rate.

Net Absorption accounts for both space leased and space vacated. In the example, 50,000 sq ft were leased and 15,000 sq ft vacated, resulting in net absorption of 35,000 sq ft, or a 17.5% rate.

Net Absorption = Gross Absorption − Vacated Space.
In the example:
35,000 sq ft = 50,000 leased − 15,000 vacated

Net Absorption offers a clearer picture of market health by considering both new leases and tenant move-outs. It “shows a lesser degree of occupancy compared to the gross absorption rate,” providing deeper insight for owners and investors.

Absorption metrics inform decisions related to “property improvements, marketing strategies, and pricing” to help retain tenants and attract new renters, based on actual space usage trends.

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