The Encyclopedia of Commercial Real Estate Advice

ENCYCLOPEDIA TOPIC FRepositioning

Absorption: The second reason repositioning projects fail is the misjudging of absorption

What if it takes you 50% longer than you planned to fill your repositioned property with tenants? How much longer would it take to reach your break-even point (see Encyclopedia Topic A, Buying), where you are paying all the expenses and the mortgage? At some point, you are not going to be able to sleep at night knowing that you are going to run out of money. Absorption is the amount of time it takes to fill vacant units in a market based on the number of units available. Absorption can be your friend in an up market or your enemy in a down market. Unfortunately, it is based on the whims of supply and demand for that property type. The number-one reason repositioning projects fail is the owner overspending for the potential return on the investment. The second reason is misjudging the absorption rate.

Absorption rates for a commercial property type are positive, negative, or flat. Multifamily property absorption rates are measured by the number of units vacant on the market divided by the total supply of units during a specific time period. The rate for office, retail, and industrial space is based on the amount of square footage vacant in the market divided by the total square footage of the total supply in the market of that property type during an allotted amount of time. Give a commercial property appraiser a call and ask them about absorption rates ...