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Understanding The Formula of Gross Absorption Rate

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Understanding The Formula of Gross Absorption Rate

Gross absorption (or GABS as we will refer to it below) is a measure of demand in the rental property market. In the rental market for commercial space it is measured in square feet while in the rental market for residential space it is measured in units.

GABS for a particular period is measured as the total space or units in relation to lease contracts that are signed during that particular period. In contrast to net absorption, gross absorption does not take into account the space or units or space vacated during that period and, as such, it cannot be used as a measure of the change in demand during the period that it refers to.

To understand how misleading GABS can be in understanding trends in the demand for commercial or residential space consider the example of a market that registers a gross absorption of 20,000 square feet at a time that 40,000 feet of previously occupied space are vacated. If we use the gross absorption as the measure of the change in demand we will conclude that demand increased by 20,000 square when actually the demand (total occupied stock) declined by 20,000. The true and accurate measure of change in demand for rental space is net absorption, which is calculated as:

Net Absorption = GABS – Vacated Space= 20,000-40,000 =-20,000

Forming a correct understanding of ongoing trends and future prospects in demand is one of the most important objectives of property market analysis. That is why it is very important to understand the meaning and deficiencies of gross absorption as a measure of demand.

One issue in terms of measuring both gross absorption and net absorption is the sub-lease space. Sub-lease space is space that is already leased by a user which decides to sublease it. In normal market conditions, with firms anticipating and operating on the basis of an expansion plan, the subleasing activity is very small and sub-lease space is not given special attention in analyzing demand trends and the strength of the local property market. However, in recessionary periods, when firms are downsizing, the amount of sub-lease space that comes in the market increases considerably. For this reason, during such periods, proper analysis of the rental market needs to take into account the trends and the amount of sublease space that is available in the market and the rates at which it is offered.

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