Absorption Rate

By Paolo October 26, 2020 Real Estate Investments 0 Comments

Absorption Rate in Residential RE

Housing Inventory and month supply. Realtors can easily access the MLS and find the absorbtion rate.

The absorption rate is calculated by dividing the number of homes that sold over the given period of time ( usually a month) by the total number of homes for sale on the market. For example if there are 500 homes for sale in my area of interest and 100 sold during the last month we can calculate an absorption rate of 100 /500 = 0.2 or 20% – The same formula can be used of course to calculate the time it takes to sell a home: If we expect to sell 20% of the inventory every month it should average 5 month to sell the entire inventory.

https://www.redfin.com/us-housing-market

Absorption Rate in Commercial RE

It is basically the same concept but in commercial real estate we are also interested in measuring the leased vs still available rentable area and we have to consider also the Net Absorbtion rate. The absorption rate at which vacant commercial space in our selected area is sold or rented over a given period of time. The net absorption rate is expressed in square feet leased as a percentage of the total available space.

Example: A, B and C are renting commercial space. They occupy 10,000 sq ft, 15,000 sq ft and 125,000 sq ft respectively. So the total area commercial space occupied is 150000 sq ft. Now A and B move out of their current places and occupy new space in the same town while C remains put in its existing premises. A moves to a larger 20,000 sq ft premises and B moves to a 25,000 sq ft place, C stays in place so together they occupy 195,000 square feet The Net absorption will be 195,000 sq ft minus 50,000 sq ft, that is, 45,000 sq ft. The net absorption in this example is 45,000 square feet and it is positive, which is good meaning that more leasable space is needed . Also the net absorption is 45,000/195,000= 23% approximately

Also, a positive Net Absorption means more space in needed and this will bring increase in prices since demand is higher