A.CRE

Net Absorption

Net absorption is the rate at which rentable area is leased up over a period of time in a given market. The net absorption figure considers construction of new space, demolition of existing space and any additional vacancies during that period. It is often used to forecast demand and supply trends and is thus a key indicator for both property owners and developers, significantly influencing their pricing and timing decisions.

Net Absorption = Vacanct Units/SF at Start of Period + New Units/SF Added to Market During Period – Units/SF Removed from Market During Period – Vacant Units/SF at End of Period

Putting Net Absorption in Context

Imagine a central business district submarket in a mid-sized city, encompassing a total of 500,000 square feet of Class A office space spread across multiple buildings. At the start of the last quarter, there were 50,000 square feet of vacant office space (10% office submarket vacancy rate). During this period, 100,000 square feet of new office space was completed, while 25,000 square feet was demolished as part of an urban redevelopment effort.

Throughout the quarter, the submarket experienced notable shifts. Some key tenants vacated their spaces early in the period, contributing to initial spikes in vacancy. Simultaneously, new office spaces totaling 100,000 square feet were completed. The introduction of these modern, well-equipped office spaces attracted a diverse mix of new tenants, including tech startups and expanding local businesses, which compensated for the vacancies left by departing tenants.

Marketing efforts and competitive leasing terms further stimulated interest and occupancy. By the end of the period, the effective management of these dynamics and the submarket’s appeal to emerging sectors led to a reduction in overall vacancy to 30,000 square feet, despite the significant addition of new space and initial departures.

Using the formula above, we calculate net absorption for this submarket as follows:

  • Vacant Units/SF at Start of Period: 50,000 square feet
  • New Units/SF Added to Market During Period: 100,000 square feet
  • Units/SF Removed from Market During Period: 25,000 square feet
  • Vacant Units/SF at End of Period: 30,000 square feet
  • Net Absorption: (50,000 + 100,000) – (25,000 + 30,000) = 95,000 square feet

This net absorption of 95,000 square feet reflects a robust demand for office space in the submarket, indicating a net gain in occupancy. It suggests that the area remains attractive for businesses, potentially leading to increased rental rates and focused development to meet ongoing market demands.

Putting “Net Absorption” in Context

Scenario

Verde Capital Partners, a Brazil-based real estate investment firm specializing in core-plus acquisitions, is evaluating the purchase of São Paulo Logistics Hub, a 400,000 square meter (approximately 4.3 million SF) industrial warehouse and distribution facility located in the Greater São Paulo area. São Paulo is the largest logistics market in Brazil and has experienced substantial demand for warehouse space due to the rapid growth of e-commerce and regional trade activity.

Analyzing Net Absorption

To assess the investment potential, Verde Capital Partners analyzes net absorption trends in the São Paulo industrial market over the last year. Using the Net Absorption formula:

Net Absorption = Vacant Units/SF at Start of Period + New Units/SF Added to Market During Period – Units/SF Removed from Market During Period – Vacant Units/SF at End of Period

Here are the key market data points for the period under review:

  • Vacant space at the start of the year: 1,000,000 square meters.
  • New space delivered during the year: 500,000 square meters.
  • Space removed from the market due to demolition or redevelopment: 100,000 square meters.
  • Vacant space at the end of the year: 800,000 square meters.

Using the formula:

Net Absorption =
1,000,000 sqm + 500,000 sqm – 100,000 sqm – 800,000 sqm
Net Absorption = 600,000 square meters

This figure shows a strong positive absorption rate, indicating robust demand for industrial space in the São Paulo market. Verde Capital Partners compares this with historical net absorption data and notes that the trend aligns with the region’s growing e-commerce activity and supply chain expansions.

Application to São Paulo Logistics Hub

São Paulo Logistics Hub is currently 85 percent leased, with 60,000 square meters of vacant space. Verde Capital Partners anticipates a reduction in vacancies to 40,000 square meters within the next year due to the current absorption trend and increasing demand. This projection further supports their underwriting assumptions, including rental growth of 5 percent annually and a stabilized occupancy rate of 95 percent within three years.

Conclusion

By analyzing net absorption, Verde Capital Partners gains valuable insight into the strength of tenant demand in São Paulo. The positive net absorption figure reinforces the firm’s belief that the São Paulo Logistics Hub is a sound investment opportunity within the core-plus risk spectrum. It also aids in developing a pricing strategy that reflects the competitive demand for industrial space in the area.

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