What is net absorption in commercial real estate markets?

Any difference in leased space in a certain commercial sector or location between both the present and previous time periods is known as net absorption. The difference between both the commercial spaces relinquished by companies or tenants in a given time frame and the spaces snapped up by them or similar commercial enterprises in the same commercial location are known as net absorption.

In a commercial market, net absorption is a critical indicator for analysing supply and demand fluctuations. Gross absorption primarily considers one side of the equation: the total amount of space absorbed or filled in a given market during a certain time period.

Illustration of net absorption

Assume that three tenants – A, B, and C – have hired space in Connaught Place, Delhi’s central business district. They take up 100, 150, and 200 square feet of space, respectively. As a result, they have 450 square feet of commercial space at Connaught Place.

Assume that A and B leave their current locations and relocate to Connaught Place, while C remains in his current location. ‘A’ relocates to a 200-square-foot location, while ‘B’ relocates to a 250-square-foot location.

As a result, the total amount of space vacated in Connaught Place will be 250 square feet (100 square feet + 150 square feet).

Connaught Place’s total absorption will be 450 square feet (200 square feet + 250 square feet).

The net absorption will be 450 square feet less 250 square feet, or 200 square feet. In this case, the net absorption is positive.

What is the difference between negative and positive net absorption?

Extra space was rented than was vacated/supplied in the market, resulting in positive Net Absorption. This merely involves that the supply of business space in a given market is decreasing. Commercial rents would begin to mature in a positive Net Absorption situation. Negative Net Absorption signifies that more commercial space was vacated/supplied in a specific market than what was leased or absorbed by commercial tenants. Commercial rents would start to decline or freeze in a negative Net Absorption situation.

Real estate firms, as well as agents, investors, and commercial tenants, are interested in net absorption to evaluate the risk, possibilities, and give a deeper understanding of broad market patterns. If there is a pattern of negative net absorption in the market under examination, an investor wanting to park cash in commercial real estate must reject it.

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