Absorption rate is the pace at which available space is leased or sold in a market over a set period, usually a quarter or a year. In commercial real estate it measures the balance between demand and supply, signaling whether a submarket is tightening toward a landlord's market or loosening toward a tenant's market.
How Is Absorption Rate Calculated?
Absorption rate is calculated by measuring how much available space is occupied over a period. In commercial real estate the leading measure is net absorption, which equals total newly occupied space minus total vacated space. Per Corporate Finance Institute, a positive figure means demand outpaced move-outs, while a negative figure signals contracting demand and rising vacancy.
Gross absorption counts only new occupancy, ignoring vacated space, so it always runs higher than net absorption. Analysts also convert supply into a time measure called months of supply, dividing available space by the average absorbed per month. Both views translate raw square footage into a demand signal an operator can act on.
Measure | Formula |
Net absorption | Newly occupied space minus vacated space |
Gross absorption | Total square footage newly leased, ignoring move-outs |
Months of supply | Available space divided by average space absorbed per month |
Why Absorption Rate Matters
Absorption rate matters because it tells an operator whether a market can absorb new supply before it prices rent growth, concessions, or a development into a pro forma. Sustained positive net absorption tightens vacancy and supports rent increases, while negative absorption forces landlords to cut rates and offer concessions to fill space.
The metric is a leading indicator that moves ahead of headline rent. Per CBRE, the U.S. office market posted seven consecutive quarters of positive net absorption through Q4 2025, and vacancy recorded its first year-over-year decline since Q1 2020. An underwriter who reads absorption trends early can price a lease-up assumption that later rent data only confirms.
Example
An analyst studies an office submarket with 1,000,000 square feet available. Over one quarter, tenants newly occupy 100,000 square feet while 20,000 square feet is vacated. Net absorption equals 100,000 minus 20,000, which is 80,000 square feet, or about 26,667 square feet per month.
Component | Amount |
Newly occupied space | 100,000 SF |
Vacated space | 20,000 SF |
Net absorption (quarter) | 80,000 SF |
Average per month | 26,667 SF |
Months of supply | 1,000,000 / 26,667 = 37.5 months |
At that pace, the 1,000,000 square feet of available space represents 37.5 months of supply, more than three years. A months-of-supply figure that high signals a soft, tenant-favorable submarket where lease-up assumptions should be conservative.
Variations and Edge Cases
Absorption rate is measured differently across property sectors and data providers, so an operator should confirm the basis before comparing two figures. Net and gross absorption answer different questions, and residential brokers often express absorption as a percentage of inventory rather than in square feet.
Variant | Treatment |
Net absorption | Newly occupied minus vacated space; the standard commercial demand gauge |
Gross absorption | New occupancy only; always higher than net, useful for leasing velocity |
Residential percentage | Homes sold divided by homes available, times 100, per period |
Seller's vs buyer's market | Above roughly 20 percent favors sellers, below 15 percent favors buyers, per common brokerage thresholds |
New deliveries | Speculative construction can push net absorption negative even with strong leasing |
The most common mistake is reading gross absorption as market health. Strong gross leasing can coincide with negative net absorption if move-outs and new deliveries outrun new occupancy, which is why net absorption is the truer demand signal.
Absorption Rate vs Vacancy Rate
Absorption rate is often confused with vacancy rate, and they describe motion versus a snapshot. Absorption rate is the change in occupied space over a period, a flow that shows the direction and speed of demand. Vacancy rate is the share of total space sitting empty at a point in time, a level that shows the current condition.
The practical result is that the two move together but lag differently. Positive net absorption pulls the vacancy rate down over time, while negative absorption pushes it up. An operator watches absorption to anticipate where vacancy is heading, then confirms the destination with the vacancy level itself.
Frequently Asked Questions
How do you calculate absorption rate?In commercial real estate, net absorption equals total newly occupied space minus total vacated space over a period. If a submarket newly occupies 100,000 square feet and 20,000 square feet is vacated in a quarter, net absorption is 80,000 square feet. Gross absorption counts only new occupancy.
What is net absorption versus gross absorption?Net absorption subtracts vacated space from newly occupied space, so it reflects true demand change and can be negative. Gross absorption counts only new leasing and expansions, ignoring move-outs, so it is always positive and higher. Net absorption is the standard gauge of market health.
What is months of supply?Months of supply is the available space divided by the average space absorbed per month, showing how long current inventory would take to fill at the recent pace. If 1,000,000 square feet is available and 26,667 square feet is absorbed per month, that is 37.5 months of supply.
Related Terms
Loss to Lease
Rent Roll
Cap Rate
Broker Analytics
Due Diligence