Alright, let's talk about absorption rates—the north star to understanding demand in the rental market.
Whether we're dealing with multifamily apartments, single-family homes, townhomes, or condos, absorption rates tell us how many rental units are being snapped up over a given period. Typically, we look at this over a year, but you can also track it quarterly or even monthly.
Why does this matter? Because absorption rates are a crystal-clear reflection of demand for multifamily real estate developers. When renters are grabbing up apartment homes, that's a sign of confidence in the market. It's a vital metric for anyone in real estate looking to add or acquire multifamily projects.
Calculating absorption is as simple as it gets. Lets dig in!
You start by taking the number of occupied units at the end of your period and subtracting the number at the beginning. Typically this is calculated by year but can also be by quarter or month.
# End of Year Units - # Beginning of Year Units = Absorption Rates
Say we had 991,430 units occupied at the end of 2022, and 955,919 at the start.
Do the math, and you've got an absorption of 35,511 units for the year. That’s a positive rate, signaling strong demand—more units were rented than left vacant. On the flip side, a negative absorption rate means more units were left empty than filled, which flags a drop in demand to multifamily developers. Remember, this isn’t about gross activity—just the net increase or decrease in occupied units.
Absorption rates are more than just numbers—they’re the pulse of the market. A high absorption rate means renters are confident and willing to pay market rent, and the demand for housing is high. But if the absorption rate is low or, worse, negative, it tells a different story. Maybe there’s an economic downturn, a shift in population, or just changing tastes in housing.
For example, if 3,406 new units hit the market, but only 223 get absorbed in a quarter, that’s a clear sign demand is cooling off. It could be overbuilding or just a dip in renter confidence. But if more units are being absorbed than what’s being built, you've got yourself a hot market with demand through the roof. Get to building!
Understanding these trends is crucial, whether you’re an investor, a developer, or a third-party sales team working through a lease-up. A strong absorption rate usually means a thriving market where demand outpaces supply. This often leads to rent hikes and lower vacancy rates—a dream scenario for landlords and developers.
Absorption rates are your compass in navigating the rental market. They give you insights into renter confidence, market demand, and future trends. Keeping a close eye on these rates can help real estate pros make smart moves when it comes to development, investment, and property management strategies.
The market is always shifting, and understanding absorption rates is your key to staying ahead and capitalizing on new opportunities. This is part one of our multi-part series on absorption rates, retention, and what you can do to prepare yourself for any market condition you find yourself in to win the market.
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