What is net absorption in commercial real estate markets?

[ecis2016.org] We explain the importance of Net Absorption, in terms of ascertaining the supply and demand dynamics in a commercial real estate market

Net absorption is the change in leased space in a specified commercial market or locality, between the current time period and the last specified period. Net absorption is basically the difference between the commercial spaces vacated in a certain time period by companies or tenants and the spaces taken up by them or other commercial entities in the same locality of commercial place.

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Net absorption is a very important metric, to look at supply and demand dynamics in a commercial market. Gross absorption only looks at one side of the picture, that is, total space taken up or occupied in a particular market in a specified duration.

Net absorption example

Suppose three tenants – A, B and C – have rented space in Delhi’s CBD Connaught Place. They occupy 100 sq ft, 150 sq ft and 200 sq ft of space, respectively. So the total area commercial space occupied by them in Connaught Place is 450 sq ft.

Now suppose, A and B move out of their current places and occupy new spaces in Connaught Place while C continues in his existing premises. ‘A’ moves to a 200-sq ft premises and ‘B’ moves to a 250-sq ft place.

So, the total space vacated in Connaught place will be 250 sq ft (100 sq ft +150 sq ft).

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The total absorption in Connaught Place will be 450 sq ft (200 sq ft +250 sq ft).

The net absorption will be 450 sq ft minus 250 sq ft, that is, 200 sq ft. The net absorption in this example is positive.

What is negative net absorption and positive net absorption?

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Positive Net Absorption means more space was leased than what was vacated/supplied in the market. It basically means that there is decrease in supply of commercial space in a particular market. Commercial rents in a positive Net Absorption scenario would tend to rise. Negative Net Absorption means that more commercial space was vacated/supplied in a particular market than what was leased or absorbed by commercial tenants. Under negative Net Absorption scenario, the commercial rents would tend to fall or cool down.

Net absorption is of special interest to real estate companies and also for brokers, investors and commercial tenants to look at risks, opportunities and get a better picture of the overall market dynamics. An investor looking to park funds in commercial real estate should avoid a particular market if there is a trend of negative net absorption in the market under consideration.

Source: https://ecis2016.org/.
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Source: https://ecis2016.org
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