How is net absorption calculated?
Net absorption is the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant during a specific period.
This is a great question, because not only is it an important statistic to measure the momentum and performance of a real estate market, but it’s my favorite data point. The concept itself can be tricky for anyone not looking at statistics as a full time job. Generally, when we use the word ‘absorb’ it’s in a context similar to ‘absorbing new information’ and synonyms associated with any use of the word include ‘riveting,’ ‘spellbinding,’ and ‘captivating’ – among others.
Ironically, absorption in the commercial real estate world can be a very riveting number for owners, investors, asset managers, and especially researchers like me.
This is not to be confused by gross absorption, which only measures the amount of square feet that became physically occupied during a specific time frame.
Simply put, net absorption is the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant during a specific period (usually a quarter or year).
Gross absorption = Total amount of space that tenants in a specific geographic area physically moved into during a specific period
Net absorption = Total amount of space that tenants physically moved into – Total amount of space that tenants physically moved out if
You’ll notice one word that I’ve used a few times now: physical. This is important to note. At JLL we track absorption at the time of physical occupancy because that is the time at which the space is no longer physically vacant. Makes sense, right? If a company leases 100,000 square feet but their lease does not commence for another six months, the space is still vacant. It’s no longer available for lease, but I think what’s most important and often forgotten is that the space cannot be absorbed at the time it was leased. Until the company moves, it still occupies another location! How can it absorb new real estate when it is still physically located in its old real estate?
In less statistical terms, net absorption could be considered like this:
- ABC Corp currently occupies 100,000 square feet at 1 Main Street.
- In January 2017 they leased 150,000 square feet at 2 Main Street.
- ABC Corp will move to 2 Main Street in June 2017.
- No change in physical absorption is recorded.
- In June 2017, ABC Corp moves out of 100,000 square feet at 1 Main Street and into 150,000 square feet at 2 Main Street.
- 1 Main Street records negative net absorption of 100,000 square feet.
- 2 Main Street records positive net absorption of 150,000 square feet.
- The market records positive net absorption of 50,000 square feet.
It sounds like a riddle, right? It can be, which is why we take great pride in closely tracking our market and presenting you with the final numbers so that you don’t have to do the math yourself.
Want to take a deep dive into our statistics to learn more about net absorption? Feel free to reach out to me for further information or with any questions you have.