Net Absorption

Net absorption is the rate at which rentable area is leased up over a period of time in a given market. The net absorption figure considers construction of new space, demolition of existing space and any additional vacancies during that period. It is often used to forecast demand and supply trends and is thus a key indicator for both property owners and developers, significantly influencing their pricing and timing decisions.

Net Absorption = Vacanct Units/SF at Start of Period + New Units/SF Added to Market During Period – Units/SF Removed from Market During Period – Vacant Units/SF at End of Period

Putting Net Absorption in Context

Imagine a central business district submarket in a mid-sized city, encompassing a total of 500,000 square feet of Class A office space spread across multiple buildings. At the start of the last quarter, there were 50,000 square feet of vacant office space (10% office submarket vacancy rate). During this period, 100,000 square feet of new office space was completed, while 25,000 square feet was demolished as part of an urban redevelopment effort.

Throughout the quarter, the submarket experienced notable shifts. Some key tenants vacated their spaces early in the period, contributing to initial spikes in vacancy. Simultaneously, new office spaces totaling 100,000 square feet were completed. The introduction of these modern, well-equipped office spaces attracted a diverse mix of new tenants, including tech startups and expanding local businesses, which compensated for the vacancies left by departing tenants.

Marketing efforts and competitive leasing terms further stimulated interest and occupancy. By the end of the period, the effective management of these dynamics and the submarket’s appeal to emerging sectors led to a reduction in overall vacancy to 30,000 square feet, despite the significant addition of new space and initial departures.

Using the formula above, we calculate net absorption for this submarket as follows:

  • Vacant Units/SF at Start of Period: 50,000 square feet
  • New Units/SF Added to Market During Period: 100,000 square feet
  • Units/SF Removed from Market During Period: 25,000 square feet
  • Vacant Units/SF at End of Period: 30,000 square feet
  • Net Absorption: (50,000 + 100,000) – (25,000 + 30,000) = 95,000 square feet

This net absorption of 95,000 square feet reflects a robust demand for office space in the submarket, indicating a net gain in occupancy. It suggests that the area remains attractive for businesses, potentially leading to increased rental rates and focused development to meet ongoing market demands.

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