Absorption

Absorption measures how quickly a market takes up new housing. For a single building, it is the number of units leased per month from opening until the building reaches stable occupancy. For a market, it is the net change in occupied units over a period, which reflects both new households arriving and existing households moving. Developers and lenders project absorption to estimate how long lease-up will take.

Lease-up time is expensive. During it, the building carries its full construction loan balance and full operating expenses while collecting only partial rent. Assume a 100-unit building leases 10 units per month: it takes about ten months to fill, during which the shortfall in rent must be covered by the developer's budget or additional equity. A slower pace of 5 units per month doubles that period and the cost.

Absorption is also the link between individual projects and the broader supply picture. When many buildings open in the same submarket at once, each leases more slowly, and owners compete with concessions that lower effective rents. When little has been built and demand is growing, absorption is fast and vacancy tight, which is the condition under which rents rise. We discuss the mechanism in Lesson 8: How Supply and Demand Affect Rent.