Absorption Rate: What It Means for Real Estate and Why Investors Should Care

A Glossary of CRE & PropTech Terms

In the wake of the pandemic, one metric has become increasingly essential: the absorption rate. Frequently mentioned in discussions around market health, the absorption rate offers insights into leasing demand and vacancy levels across all assets, making it crucial for assessing a property’s current and future performance. Here, we’ll break down what the absorption rate is and why it’s a key health indicator for real estate investors.

What Is An Absorption Rate?

At its core, the absorption rate measures how much vacant space is being leased over a specific period relative to the total available square footage. A positive absorption rate indicates strong demand, with more space being leased than vacated, while a negative absorption rate reflects rising vacancies as more space becomes available than is being filled.

This metric is particularly useful in understanding market balance, as it can hint at whether the market is overbuilt, underserved, or stabilizing.

Why It Matters in Today’s Market 

The COVID era reshaped many aspects of CRE, making absorption rates an even more critical measure. For example, the office sector has faced negative absorption rates due to the rise of remote and hybrid work models, particularly in urban areas such as business districts. With many predicting this will continue into 2025, companies are continually rethinking their space needs. Similarly, the multifamily sector has recently seen a drop in absorption rates, following a wave of construction that hit major cities in 2021 as low financing costs emerged. As the dust settles, cities like Nashville, Atlanta, and Austin have dealt with negative absorption rates resulting from oversupply or shifting to WFH models.

Why Investors Should Care

For investors, the absorption rate is more than just a measure of demand; it’s a window into an asset's financial potential. Positive absorption rates often signal:

• Higher occupancy, leading to stronger cash flow.

• Rent growth, contributing to increased Net Operating Income (NOI).

• Asset appreciation, driving long-term value.

Conversely, negative absorption rates may indicate risks such as declining demand, falling rents, and potentially higher cap rates (lower valuation multiples). By tracking absorption trends, investors can assess market stability, identify opportunities, and avoid overexposure in struggling sectors.