Absorption
Also called: Net absorption, Lease-up absorption
Absorption is the net change in occupied units in a market over a period, measuring how quickly new and existing supply is being leased by tenants.
Absorption is the demand side of the supply and demand equation that drives rent growth. A market delivering 4,000 new units against 5,000 units of annual absorption is tightening. The same delivery against 1,500 units of absorption is oversupplied, and rents will flatten or fall regardless of how attractive the long-term story is.
For underwriting, absorption matters most in the near term. Supply already under construction is largely knowable, and comparing that pipeline against trailing absorption is the most reliable available signal for whether rent growth assumptions in years one through three are realistic.
Rules of thumb
- Compare the units under construction against trailing twelve month absorption to get a rough months-of-supply figure.
- Absorption is a submarket phenomenon. Metro-level figures routinely mask a heavily oversupplied urban core inside an otherwise healthy market.
Related terms
- Supply Pipeline
The supply pipeline is the volume of multifamily units permitted, under construction, or planned in a market, typically expressed as a percentage of existing inventory.
- Submarket
A submarket is a geographic subdivision of a metropolitan area that functions as a distinct competitive set, where properties compete directly with each other for the same pool of renters.
- Rent Comparables
Rent comparables are recently leased units at competing properties used to establish the market rent a subject property can achieve, adjusted for differences in size, condition, amenities, and location.