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Investor Glossary
3 min read
by Jeff Hamann

Absorption in Industrial Real Estate

Absorption in industrial real estate is often used as a key metric to assess the health of tenant demand within a market.

In this article:
  1. What Is Absorption in Industrial Real Estate?
  2. What Is Net Absorption?
  3. How New Development Impacts Net Absorption
  4. Tenant Relocations and Net Absorption
  5. Related Questions
  6. Get Financing
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What Is Absorption in Industrial Real Estate?

When discussing a commercial real estate market’s health, absorption is often looked at as a key indicator of performance. But what does it mean? In simplest terms, absorption is how much space has been leased in a market or submarket over a specified period — usually a quarter or a one-year period.

What Is Net Absorption?

Typically when discussing commercial real estate markets, however, absorption is more commonly discussed in terms of net absorption. Net absorption is the total amount of space (given in square feet) that has been leased, minus the amount of space that has been vacated, during a specific amount of time. A market with positive net absorption shows you that more space has been leased than vacated, and negative net absorption shows the opposite.

With most industrial real estate markets, net absorption tends to be positive. On the other hand, in markets experiencing extremely low vacancy — in other words, very little available space — negative net absorption is more likely, particularly if push factors like high rents lead multiple tenants to find more readily available space in less costly parts of the region or country.

How New Development Impacts Net Absorption

It’s important to note that absorption is not negatively impacted by significant construction activity. If a new distribution center opens but is unleased — thus vacant — this will have no impact on a market’s net absorption. This is because absorption calculations are only based on space going from leased to unleased, or vice versa.

If anything, construction activity usually points to an increase in positive net absorption. This is because newly delivered distribution space is commonly leased fairly quickly.

Tenant Relocations and Net Absorption

One thing that can impact a market or submarket’s absorption is changes in how industrial occupiers are utilizing space. If a tenant relocates to a larger space, this will have a net positive impact on absorption. However, if a company leases a new, 200,000-square-foot distribution center — while vacating its previous, 300,000-square-foot space — this will push absorption negative for the move.

This can be particularly important when examining company shifts from one submarket to another within the same market. If Amazon leases a 1 million-square-foot warehouse on Jacksonville’s Northside, shuttering 1 million square feet of operations in the metro’s Westside submarket, then the Westside’s lower net absorption could lead an investor or developer to believe that demand simply isn’t present there.

In reality, however, this may not be true: The property owner of the vacated space may just be refitting the space prior to putting it up for lease, for example. And the negative impact of any large relocation could wash out significant positive absorption within the submarket, too. For example, if Amazon’s 1 million-square-foot shift from the Westside occurred, even alongside 900,000 square feet of positive absorption from other leasing activity, the submarket would still register a loss of 100,000 square feet.

Related Questions

What is absorption in industrial real estate?

Absorption in industrial real estate is the net change in occupied space over a given period of time. It is calculated by subtracting the amount of space vacated from the amount of space leased. This is an important metric for investors and developers to track, as it can provide insight into the health of the industrial real estate market. According to IndustrialProperty.loan, absorption is typically measured on a quarterly or annual basis.

How does absorption affect industrial real estate prices?

Absorption is the rate at which space is leased or sold in a given market. When absorption is high, it indicates that demand for space is strong, which can lead to higher prices for industrial real estate. Conversely, when absorption is low, it can lead to lower prices.

According to IndustrialProperty.Loan, absorption is a key indicator of the health of the industrial real estate market. It is important to note that absorption can vary significantly from market to market, so it is important to keep an eye on absorption rates in the specific market you are interested in.

For more information on financing industrial real estate, check out IndustrialProperty.Loan.

What are the benefits of absorption in industrial real estate?

Absorption in industrial real estate can provide a number of benefits to investors. For one, it can help to reduce vacancy rates, which can lead to higher rental income. Additionally, absorption can help to increase the value of the property, as it is seen as a desirable asset. Finally, absorption can also help to reduce the amount of time it takes to fill a space, as there is more demand for industrial real estate.

For more information on absorption in industrial real estate, you can check out this article from CBRE.

What are the risks associated with absorption in industrial real estate?

Industrial real estate investments come with a few risks, including tenant default and longer lease terms. Additionally, absorption can be a risk factor. Absorption is the rate at which space is leased in a given market, and it can be slower in industrial real estate than in multifamily or single-family residential real estate. This means that a vacant building may take longer to fill than a residential property.

Repositioning a dated industrial facility can be one of the surest ways to earn a strong return on your investment. However, this can also be a risk factor, as it requires significant capital to bring the property up to speed.

What are the most common types of absorption in industrial real estate?

The most common types of absorption in industrial real estate are manufacturing, warehouse, industrial parks, flex/hybrid, and top MSAs. According to Commercial Real Estate Loans, these are the main types of industrial property. Additionally, Lee & Associates' report states that discount stores, grocery stores, fitness centers, and discount apparel centers are also seeing notable gains in leasing activity.

How can investors use absorption to their advantage in industrial real estate?

Investors can use absorption to their advantage in industrial real estate by understanding the current market trends and tenant demand. By understanding the current market trends, investors can identify areas of opportunity and capitalize on them. For example, if there is a high demand for industrial space in a certain area, investors can purchase properties in that area and benefit from the increased tenant demand. Additionally, investors can use absorption to their advantage by understanding the current tenant demand and purchasing properties that meet the needs of those tenants. By doing so, investors can ensure that their properties are in high demand and can maximize their return on investment.

Sources:

  • What to Know Before Making Your 1st Industrial Property Investment
In this article:
  1. What Is Absorption in Industrial Real Estate?
  2. What Is Net Absorption?
  3. How New Development Impacts Net Absorption
  4. Tenant Relocations and Net Absorption
  5. Related Questions
  6. Get Financing

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