What is Net Absorption in commercial real estate markets?


We explain the importance of Net Absorption, in terms of ascertaining the supply and demand dynamics in a commercial real estate market

Net Absorption is basically the difference between the commercial spaces vacated in a certain time period by companies or tenants and the spaces taken up by them or other commercial entities in the same locality of commercial place.

For Example: If there are exactly three tenants A, B and C in a commercial locality, lets say in Connaught Place in Delhi. They occupy 100 sq ft, 150 sq ft and 200 sq ft respectively. So the total area commercial space occupied in Connaught Place is 450 sq ft. Now A and B move out of their current places and occupy new space in Connaught Place while C remains put in its existing premises. A moves to a 200 sq ft premises and B moves to a 250 sq ft place. So the total space vacated in Connaught place will be 250 sq ft (100 sq ft +150 sq ft). The total absorption in Connaught Place will be 450 sq ft (200 sq ft +250 sq ft). The net absorption will be 450 sq ft minus 250 sq ft, that is, 200 sq ft. The net absorption in this example is positive.

In simple words, net absorption is the change in leased space in a specified commercial market or locality between the current time period and the last specified period. The Net Absorption is a very important metrics to look at supply and demand dynamics in a commercial market. Gross absorption only looks at one side of the whole picture, that is, total space taken up or occupied in a particular market in a specified duration.

 

What is Negative Net Absorption and Positive Net Absorption?

Positive Net Absorption means more space was leased than what was vacated/supplied in the market. It basically means that there is decrease in supply of commercial space in a particular market. Commercial rents in a positive Net Absorption scenario would tend to rise. Negative Net Absorption means that more commercial space was vacated/supplied in a particular market than what was leased or absorbed by commercial tenants. Under negative Net Absorption scenario, the commercial rents would tend to fall or cool down.

Net Absorption is of special interest to real estate companies and also for brokers, investors and commercial tenants to look at risks, opportunities and get a better picture of the overall market dynamics. An investor looking to park funds in commercial real estate should avoid a particular market if there is a trend of negative Net Absorption in the market under consideration.

 

Commercial real estate news

The commercial real estate sector had faced the impact of the COVID-19 pandemic-induced lockdowns during the first and second waves, with uncertainties around the reopening of businesses.

According to a report Office Market Update – Q1 2021 by consultancy firm, JLL, the overall office market in India had seen a decrease in net absorption by 33% during first quarter of 2021, quarter-on-quarter (Q-o-Q), with 5.53 million sq ft of space leased during the period January to March 2021.

Cities that accounted for about 80% of the net absorption during this quarter included Bengaluru, Hyderabad and Delhi-NCR. Further, the report stated that Bengaluru and Delhi-NCR were the markets that have seen an increase in net absorption, compared to Q4 of 2020.

Chief economist and head of research and REIS, India, JLL, Samantak Das said: “While 2020 ended on a relatively high note, there was still uncertainty in the market, with respect to resumption of business as usual. Occupiers continued to adopt a cautious approach and focused on reassessing their real estate portfolios and long-term commitments. To add to the woes, increasing fears of a spike in COVID-19 cases in the second half of March 2021 further pushed the occupiers to press pause again and postpone their real estate decisions.” He further added: “As the vaccination drive is gaining momentum and occupiers remain cautiously optimistic, the year 2021 is expected to witness close to 38 million sq ft of new completions, while net absorption is likely to hover around 30 million sq ft, with a marginal downward bias. This will be at par with the average annual net absorption levels seen during 2016-2018.”

 

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