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Net Absorption

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Net Absorption

Net absorption, which we will denote as NABS hereafter, is a term often used in commercial property investment analysis and refers to the change in the occupied stock in a commercial property market from one period to the next.

So if we denote the occupied stock of this period as OSt and the occupied stock of the previous period as OSt-1 then NABS in this period, NABSt, can be calculated as:

NABSt= OSt - OSt-1

Given the above formula, it can be easily understood that net absorption can be negative if the occupied stock declines from one period to the next, or can be positive if the occupied stock increases from one period to the next.

Note that the occupied stock in each period is considered as the stock that is physically occupied and is under a valid lease contract. In this sense, the occupied stock at any given point in time, reflects the realized total demand for space in the market, and, thus, net absorption measures the change in total demand. 

A gray area in the measurement of occupied stock is sublease space, which is actually space under contract, but is being placed in the market as vacant for sub-leasing. Typically, this space is counted as occupied, but in severe downturns when firms are downsizing and there is significant amount of space in the market for subleasing, it is often counted when trying to determine the market vacancy rate.

Net absorption should not be confused with Gross Absorption which simply refers to the cumulative amount of space covered by all the lease contracts that were signed over a particular period without taking into account any space that was vacated due to expiring leases. For this reason using simply the term absorption without qualifying it whether it refers to net or gross can be confusing. Consider that gross absorption can be positive but net absorption can be negative. The true measure of change in total demand is net absorption. Gross absorption is an inappropriate and potentially misleading indicator in terms of understanding and evaluating changes in total demand for space.

CALCULATION EXAMPLE

To demonstrate how the net absorption formula is applied let’s consider two examples from the apartment market, one that results in negative NABS and one that results in positive NABS.

Let’s consider an apartment market with an occupied stock in this period (year, quarter, etc), OSt, equal to 200,000 units and an occupied stock of 220,000 units in the previous period, OSt-1. Then NABSt in this apartment market in this period, t, is negative and equal to:

NABSt = 200,000 – 220,000 = -20,000

Now consider that the occupied stock in this period, OSt, is equal to 200,000 units with an occupied stock of 185,000 units in the previous period, OSt-1. Then NABSt in this apartment market in this period, t, is positive and equal to:

NABSt = 200,000 – 185,000 = 15,000

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