The amount of occupied space at the end of a period less the amount of space occupied at the beginning of the same period. Net absorption accounts for space vacated during the period as well as new additions (ex. new construction) over the applicable period.
Net absorption is calculated by using the formula of total vacant square footage at the start of a time period plus square feet constructed (or “brought online”) during the period, less square feet demolished or otherwise removed during the period less square feet vacant at the end of the time period.
For example, if a market has 1,000,000 square feet of space and 50,000 square feet are leased while 20,000 square feet are vacated during the period and there is no new construction or demolition of existing properties, then the net absorption rate would equal 3.0% (50,000 sf leased less 20,000 vacated equals 30,000 sf net absorption divided by 1,000,000 sf total space).
By plotting net absorption, market trends can be revealed. Developers and real estate brokers widely track net absorption to gauge demand. In the above example, there was a net absorption of 30,000 sf. This is also called a positive absorption. It shows that tenant demand is strong and, coupled with a healthy market, is an overall positive sign of growth.
With positive net absorption, lease prices will likely see an increase. This can attract more developers, who will build out more space to meet the demand.
On the other side is negative net absorption. This occurs when there is an outflow of tenants. If our same building experiences 50,000 sf vacated and only 20,000 leased, there is a negative net absorption of 30,000 sf. Negative net absorption isn’t necessarily bad. It’s important to understand if the overall trend is beginning to turn down or if this one data point is just a temporary pause in a larger uptrend.
If the trend begins turning down, prices will likely follow. Net absorption is only one metric and doesn’t tell the entire story. For investors to realize the larger picture, net absorption should be used in conjunction with other metrics.