Net absorption is a measure of the change in occupied stock within a specific commercial real estate market, for a specific period.
Where net absorption is positive, it means that more space is occupied than before. This hints that the demand for space is growing. Assuming unchanged supply, this should predict increasing rentals for owners or tenants.
A negative net lease absorption (less space is occupied than before) hints at increasing vacancies. I.e. more tenants are leaving than coming in. This reduction in demand (assuming unchanged supply) means rentals should become cheaper.
Net absorption works as follows, generally over a specific, defined period of time
- Positive effect: new leases concluded (either on existing stock, or that newly-let portion of new stock built), or that specific increase in space on existing leases
- Negative: tenants moving out (either from existing stock, or that previously-leased portion of space mothballed/recycled/demolished), and that specific reduction in space on a lease renewal
- Neutral: sub-leasing of currently let space
Note: The same logic applies for absorption in a sales context – which is more meaningfully applied to units being sold in a specific property. Here we go focus on lease absorption.
(For CRE experts, the occupied stock lens elegantly solves the complexity (and supply-side impact) of additional space being developed, or mothballed/demolished/recycled for other use. Thus changes in supply, even though they may have an impact on prices, are excluded from the calculation of net absorption value. For more please see fringe case ³ below)
A simple example of net absorption
A property has 80K sqm of rentable area or GLA (with 10K sqm of that being vacant).
What is the property’s net absorption over a 3 month period given the following events?
- 5K sqm of vacant space is taken by new tenants moving in
- 3K sqm of space is released by tenants who move out
- 1 tenant, occupying 10K sqm renews for 12K sqm (taking up an extra 2K sqm)
- A tenant, occupying 8K sqm renews for only 2K (releasing 6K sqm)
- One tenant sublets 5K of their space
Calculation one
The net absorption for the 3 month period is a negative 2K sqm. Why? Because 2K sqm less space is occupied.
Calculation: 5K sqm new space let – 3K sqm released + 2K sqm positive renewal – 6K sqm negative renewal (sub-let is ignored)
Notice how vacancy supply is ignored.
Calculation two
- 70K sqm occupied at beginning of period
- 68K sqm occupied at end of period (70K occupied + 5K new – 3K move out + 2K greater renewal – 6K released on renewal)
The net absorption for the 3 month period is a negative 2K sqm.
Calculation: 68K sqm space at end, less 70K sqm occupied space at beginning.
As above, vacancy supply never factored into the calculation.
Gross absorption (FYI)
The property’s gross absorption (always either a positive, or nil value) is 7K sqm.
Calculation: 5K sqm new space let + 2K sqm positive renewal (sub-let is ignored)
More complex example (catering for new supply, and pre-let space)
A node has 800K sqm of rentable area or GLA (with 100K sqm of that being vacant).
What is the node’s net absorption over a 3 month period given the following events?
- 50K sqm of vacant space is taken by new tenants moving in
- 30K sqm of space is released by tenants who move out
- 70K sqm of new space is delivered, of which 40K sqm is pre-let (and the balance of 30K sqm is vacant)
The node’s net absorption for the 3 month period is 20K sqm.
Calculation complex one
The net absorption for the 3 month period is a positive 60K sqm.
Calculation: 50K sqm new space let – 30K sqm released + 40K sqm pre-let space
Calculation complex one
- 700K sqm occupied at beginning of the period
- 760K sqm occupied at end of period (700K occupied + 50K new – 30K move out + 40K newly-leased)
The net absorption for the 3 month period is a positive 60K sqm.
Calculation: 760K sqm space at the end, less 700K sqm occupied space at beginning.
Gross absorption (FYI)
The node’s gross absorption (always either a positive, or nil value) is 90K sqm.
Applications of net absorption
Instead of simply a single property, net absorption can be measured across either:
- An area¹ (i.e. is this node seeing demand pressure and supply constraints?), or
- An occupier’s leased portfolio (is more space being taken up than is being let go?), or
- An owner or property manager’s portfolio of owned or managed properties
³ Fringe case: supply change vs net absorption – opposite effect on prices
Net absorption can be used as a predictor for changes in rental prices. And changes in rental prices are dependent on stock supply and demand.
In the general case, increases in occupied space, and positive absorption, lead to vacant space reducing, resulting in price inflation.
But supply changes can break this cause-and-effect model.
Let’s take the example of movement in occupied space during a period being due to leases signed on newly-built product
For purpose of explanation, say 300K sqm of new space is built. 75K sqm of that space is pre-let. Therefore 225K is vacant. And no other deals are done during this period.
Here, net absorption will be positive. But it is accompanied by an increase in available space. (Note: increases or reductions in available space are neutral to net absorption)
We have the situation of positive net absorption, happening in an environment of greater vacancy supply.
What is the effect on rental prices?
For an accurate assessment, the prevailing vacancy rates, demand for space, and type of product built (versus what is available) will need to be understood.
However, assuming normal vacancy rates, unchanged demand, and homogenous products, positive net absorption will likely be accompanied by a reduction in prices. This is counterintuitive to the default expectation.
Therefore, as with all numbers, net absorption can only be used as a guide, and needs to be viewed in the context of other numbers.
Note: The converse, but reinforcing, example applies with a significant reduction in vacant stock (e.g. repurposed, demolished or mothballed space) coupled with a reduction in occupied space.
Similarly, net absorption will be negative, and supply will have shrunk. Assuming ceteris paribus, rental prices will (counterintuitively) likely increase.
More related to net absorption
For an explanation of net lease absorption rate, please see here.
Where properties are still in construction / planned / under-renovation, leasing deals only count towards gross or net absorption on the actual occupation date.
¹ Property is not a homogenous asset class. For meaningful nodal comparison, such a value should be defined by, at minimum, a geography, property category, and grade market level. Further, more meaningful market analysis should happen at submarket level – covering, for example, the properties’ sub-category (e.g. low-rise / high-rise office), size of vacant pockets (e.g. non-divisible vacancies within the 1K to 5K sqm range), even property attributes (all logistics warehousing with height to the eaves greater than 8m, or all logistics warehousing with coverage < 60%)
