The world of commercial leasing is full of strange terms that you, as a tenant, might struggle to understand at first. One of these terms is ‘net absorption’ and is used in the context of occupancy and therefore, return on commercial real estate investments.
In such a competitive industry, it’s important that you know what net absorption is, how to calculate it and how it will affect you. So, let’s take a closer look.
What is net absorption?
Net absorption refers to the net change in occupied office space between the current period and the last period. It takes into account offices that were vacated and newly constructed commercial spaces in the same suburb, during the same measurement period. This may be a financial year, a six-month period, quarterly, or even monthly.
It provides a general idea of how long it might take to lease space as a tenant, or for your space to be filled as a landlord. In that regard, net absorption is a very useful and practical measurement.
How do you calculate net absorption?
The formula used to calculate net absorption is:
The amount of space tenants moved into (square metres) – The amount of space that tenants physically moved out of.
It may sound a little confusing, so let’s take a look at an example. Businesses A, B, and C all rent office space in one complex in Sydney. A occupies 500 square metres of space, B occupies 200 sqm, and C rents 300 sqm.
During the March quarter, Business A vacates its current space and in the same complex, moves into a larger space, totaling 700 square metres. C also vacates their current space and takes more floor space in the same complex, totaling 500 sqm.
Therefore, for the March quarter, we calculate the net absorption as so:
The space that A and C moved into, totals 1200 square metres of space, minus the space that A and C vacated, which totals 700 sqm. Therefore, the net absorption is 1200-700, which equals 500 sqm of positive net absorption. Note that if these businesses moved to spaces that were smaller than their previous space, the net absorption would be negative.
Why should you care about net absorption?
Every tenant, landlord, or investor should care about net absorption because it provides a great picture of current market dynamics and conditions. As a commercial tenant, it can help you identify the best times to apply for a new commercial lease, as well as the locations that will likely be more affordable, due to negative net absorption.
Landlords and investors benefit greatly from net absorption reporting by obtaining a better picture of how they can expect the property to perform, or how it has been performing. That then leads to better decision-making in terms of investing and renting out your space.
Talk to a professional Sydney tenant advisor
Still not sure about net absorption and how it affects your business? That’s okay, you’re not alone! The best thing to do in this situation is to get in touch with a professional Sydney commercial tenant advisor.
At Niche Tenant Advisory, we can help calculate net absorption for a number of areas, putting you in the best position when it comes to leasing commercial space in Sydney. Get in touch with Niche Tenant Advisory today. We’re here for you.