When evaluating office or retail markets, vacancy rates tell only part of the story.
Another important market indicator is absorption, which helps show whether occupied space in a market is increasing or decreasing over a specific period.
What Is Absorption in Commercial Real Estate?
Net absorption measures the change in occupied commercial space within a market over a given period.
Positive net absorption generally means more space was occupied than vacated during the period. Negative net absorption means more space was vacated than occupied.
For example, if businesses occupy 100,000 more square feet than they vacate during a quarter, the market has experienced 100,000 square feet of positive net absorption.
Absorption is often evaluated alongside vacancy, rental rates, new construction, and other market data to understand broader market conditions.
Why Does Absorption Matter?
It Helps Show Market Momentum
Absorption can provide insight into how demand for commercial space is changing. Sustained positive absorption may indicate that occupied space is increasing, while negative absorption can signal that more space is becoming available.
It Can Help Indicate Future Demand
Looking at absorption trends over time can help tenants, landlords, and investors understand how demand is changing within a particular property type or submarket.
It Can Inform Leasing Strategy
Landlords may consider absorption trends when evaluating rental rates, concessions, marketing strategies, and the timing of bringing additional space to market.
For tenants, understanding whether a market is tightening or becoming more available can provide useful context when evaluating available properties and negotiating lease terms.
It Can Provide Context for Investment Decisions
For buyers and investors, absorption can be one factor in evaluating the health and direction of a particular property type or submarket.
Positive or negative absorption does not tell the entire story, however. Investors should consider absorption alongside vacancy, rental rates, new supply, property-specific factors, and broader economic conditions.
Absorption vs. Vacancy
Absorption and vacancy measure different things.
Vacancy shows how much space is currently unoccupied.
Absorption shows how occupied space has changed over a period of time.
A market can have relatively high vacancy while still experiencing positive absorption if occupied space is increasing. Likewise, a market can have low vacancy but experience negative absorption if tenants are vacating space.
Looking at both measures can provide a more complete picture of market conditions.
Why Should Tenants, Landlords, and Investors Pay Attention?
The significance of absorption depends on the perspective of the person evaluating the market.
For tenants: Absorption trends can provide context when evaluating market availability, timing, and lease negotiations.
For landlords: Absorption can help indicate changes in demand and inform leasing and property strategy.
For investors: Absorption can provide another data point when evaluating the direction of a property type or submarket.
A building may look attractive based on its current characteristics, but understanding the broader market trajectory can provide additional context when evaluating a real estate decision.
Ask a Broker
With decades of experience in office, retail, and investment brokerage across Southeast Louisiana, David da Cunha helps clients evaluate commercial real estate opportunities in the context of broader market conditions.
Market data such as absorption, vacancy, rental rates, and new supply can help provide a clearer picture of what is happening within a submarket.
Have a question about commercial real estate or market conditions? Contact David to learn more.
