What Is Net Absorption In Commercial Real Estate?
Net absorption is an important concept to help measure and understand demand and supply in the commercial space market. Where gross absorption is the total amount of space leased up in the commercial space market, net absorption indicates the net change in demand relative to the supply of commercial space on the market. Net absorption can be either positive or negative.
The Net Absorption Formula
Net Absorption = Total Space Leased - Vacated Space - New Space
What is Gross Absorption?
Gross absorption is the total gross amount of space leased up in the commercial space market. It is the sum of all area leased through all lease transactions for a defined commercial real estate market over a specific time frame. Gross absorption is a measure of total lease activity in a given market. Gross absorption answers what the total volume of lease transactions is for that market. It indicates the total depth of the market and can be helpful, for example, in calculating potential fees for a commercial real estate broker.
What is Positive Net Absorption and Negative Net Absorption?
Positive net absorption means more commercial space was leased up than was made available on the market. It indicates a relative decrease in the supply of commercial space available to the market. Negative net absorption indicates more commercial space was vacated and placed on the market than was leased up. It indicates net demand for commercial space has decreased in the space market relative to supply.
Since positive and negative net absorption are measurements that help understand demand and supply in commercial space markets, they are useful for commercial real estate investors, commercial real estate tenants and commercial real estate developers in understanding pricing pressures and market dynamics, and identify market risks and opportunities.