Absorption is the change in the amount of occupied space in a market over a period, measured in square feet. Analysts read it as the clearest measure of tenant demand. NAIOP, the Commercial Real Estate Development Association, defines net absorption as "the net change in occupied space over a specified period", measured "at the building, submarket and market levels" (NAIOP, Terms and Definitions).
A market report states absorption for one property type, in one area, over a quarter or a year: office space in a downtown core, or warehouse space along a highway. Occupied space is space that a tenant, a subtenant or an owner physically uses. Leases set who occupies it and for how long, and the leasing guide explains how commercial leases work.
Lenders track absorption too. The US Office of the Comptroller of the Currency (OCC) supervises national banks. Its handbook lists "vacancy rates, available inventory, absorption rates, construction starts, and permits granted" among the useful market data for commercial real estate lending (OCC, Comptroller's Handbook). Read together, those figures show where a market sits in its cycle.
Net absorption is the space tenants moved into during a period minus the space they vacated. In NAIOP's words, the figure "reflects the amount of space occupied minus the amount of space vacated" and "can be either positive or negative". A report that says "absorption" with no qualifier almost always means net absorption.
Gross absorption counts every square foot tenants moved into and subtracts nothing. NAIOP defines it as "the total amount of space occupied over a given period, without subtracting the amount of space vacated". A firm that moves across the street adds to gross absorption in its new building. It leaves the same amount of space empty behind it, so net absorption stays where it was. Gross absorption measures how much moving goes on, and net absorption measures the growth in demand.
Negative absorption means tenants vacated more space than they moved into, so occupied space fell. It follows closures, layoffs and companies that move into smaller premises. One large tenant leaving can turn a quarter negative, so analysts read several quarters together.
Weak demand shows up in the deals landlords offer. The OCC lists "unusually generous concessions including rent, tenant improvement allowances, moving allowances, and lease buyouts" among the warning signs on a property loan. Those concessions include a larger tenant improvement allowance and months of free rent.
Net absorption equals the occupied space at the end of a period minus the occupied space at the start, which is the same as the space tenants moved into minus the space they vacated. Both formulas count square feet for one market and one period:
- Net absorption = occupied space at the end of the period minus occupied space at the start
- Net absorption = space tenants moved into minus space tenants vacated
- Gross absorption = space tenants moved into
Take an office submarket of 10,000,000 square feet over one quarter. Every figure is an assumption for the arithmetic.
| Office submarket, one quarter | Square feet |
|---|---|
| Inventory | 10,000,000 |
| Occupied at the start of the quarter | 8,800,000 |
| Space tenants moved into (gross absorption) | 240,000 |
| Space tenants vacated | 180,000 |
| Net absorption | 60,000 |
| Occupied at the end of the quarter | 8,860,000 |
| Vacancy rate at the start | 12.0% |
| Vacancy rate at the end | 11.4% |
NAIOP counts the inventory in net rentable area, so the figures are rentable square feet.
The absorption rate is the share of available space or units that leases or sells in a period. The OCC defines it as the "rate at which available properties are leased or sold in a specific market during a given period of time". It is "calculated by dividing the number of properties leased or sold by the total number of available properties". Thirty apartments leased in a month out of 120 available is a rate of 25% a month.
The same pace tells you how long a market needs to fill its empty space. In the example, 1,140,000 square feet stood vacant at the end of the quarter. At 60,000 square feet of net absorption a quarter, that space takes 19 quarters to fill, close to five years, if the pace holds and no new building arrives.
The vacancy rate is vacant space divided by the total inventory. NAIOP defines it as "the total amount of vacant space divided by the total amount of inventory". Net absorption lowers the vacancy rate only when it outpaces new supply, because "total inventory increases when a new building is delivered".
Add a 400,000 square foot tower to the same quarter, delivered empty. Vacancy rises although absorption stays positive:
| End of the quarter | Without the new tower | With the new tower |
|---|---|---|
| Inventory | 10,000,000 | 10,400,000 |
| Net absorption | 60,000 | 60,000 |
| Vacant space | 1,140,000 | 1,540,000 |
| Vacancy rate | 11.4% | 14.8% |
Leasing activity counts leases signed, and absorption counts space occupied. NAIOP explains that "a lease can be executed in a given quarter, but the space commitment will not show up in the absorption figures until the space is occupied at some point in the future". A firm that signs in January and moves in during July adds to leasing activity in the first quarter and to absorption in the third. NAIOP counts direct leases, subleases and expansions in leasing activity, along with preleasing in buildings under construction.
Shadow space is space a tenant leases and leaves unused. NAIOP describes it as "a portion of leased space that is not being used by the tenant", such as room held for growth or emptied by a smaller workforce. It adds that shadow space "is difficult to measure because it is not officially marketed or tracked in industry databases". The space counts as occupied, so it hides weak demand until the tenant moves out and absorption falls.
Two reports on the same market can print different absorption figures. NAIOP notes that some providers track "buildings larger than 20,000 square feet, while others include buildings as small as 5,000 square feet". Those differences "can cause variations in metrics such as vacancy and absorption reported by each provider". Follow one provider over time, and check which buildings its inventory counts.
Lease-up is the period after a new building opens during which its owner signs tenants and fills the space, until occupancy reaches a stable level. For one building, lease-up is absorption measured at the property.
The US Census Bureau measures lease-up for new apartment buildings in its Survey of Market Absorption of New Multifamily Units (SOMA). Each month it samples newly completed "residential buildings containing five or more units", and its field representatives return "at 6, 9, and 12 months after completion" (Census Bureau, SOMA). A unit counts as absorbed "when a unit in a building with five or more units has been initially rented or sold after construction and is no longer available on the market" (Census Bureau, SOMA glossary). Lenders treat rental buildings of five or more units as commercial property.
The chart follows two groups of new apartments through their first year, from the survey's Table Creator. Builders completed far more apartments in the later year, and a smaller share of them found a tenant in the first three months. Most of the gap closed by the end of the year.
Source: U.S. Census Bureau, Survey of Market Absorption of New Multifamily Units (SOMA), Table Creator, apartments in buildings of 5 or more units, annual estimates, absorptions as of the fourth quarter of 2025.
A slower lease-up costs the owner months of rent on empty units. It also delays the date the building reaches stable income. An offering memorandum often assumes a lease-up pace, and the page on pro forma NOI in an offering memorandum shows how to test it.
Preleasing is leasing space in a building before construction ends. NAIOP defines preleased space as "space that has been leased in a building that is under construction". Preleasing counts in leasing activity when the tenant signs and in absorption when the tenant moves in. A building that opens with half its space preleased starts its lease-up halfway there.
In Canada, Canada Mortgage and Housing Corporation (CMHC) uses absorption for sales of newly built homes and condominium units. Its Market Absorption Survey defines an absorbed unit as "a housing unit that has been sold and completed" (CMHC, survey methods). A unit counts as sold "when a binding contract is secured by a non-refundable deposit and has been signed by a qualified purchaser". The survey covers "structures intended for the homeownership or condominium market". It runs in "Census Metropolitan Areas which have a population of 100,000 or more".
A CMHC absorption figure therefore counts sales of new units. An office or industrial market report counts occupied square feet, as NAIOP defines it. Check which definition a figure uses before you compare two markets.
The absorption period is the time a market needs to lease or sell a new project's space or units, and lenders use it to size and time a development loan. The OCC writes that a construction loan's extension options "should be consistent with the expected construction time plus the projected absorption period". It also calls the expected absorption rate "an important consideration when establishing limits on the construction of speculative units".
The OCC's handbook sizes a loan for a project of lots or condominiums from its absorption pace:
- the loan's maximum term is 24 months
- the units need six months before they can go on sale
- buyers absorb 10 units a quarter
- the bank wants its money back after 80% of the units sell, an acceleration of 1.25
- the loan can finance 24 minus 6 months, or 6 quarters, times 10 units, times 1.25: 75 units
In the OCC's words, "units are expected to be absorbed at an average rate of 10 per quarter", and the result is "6 quarters x 10 lots/quarter x 1.25 = 75 units". At 6 units a quarter, the same 24-month loan finances 45 units. A slower absorption pace shrinks the loan.
Appraisers apply the same test. For land valued as developed lots, the OCC writes that "the feasibility study or the market analysis in the appraisal should support the absorption period for the developed lots". Otherwise the appraiser values part of the tract as raw land. Once the loan closes, the OCC names "slower absorption of space than anticipated" as a warning sign.
An office or apartment project often moves from its construction loan to a bridge loan for the lease-up. The OCC describes construction financing "with the facility converting to bridge financing for the expected stabilization period". The lending guide covers how long commercial real estate loans run.