Absorption is the amount of inventory (i.e. housing units,square footage) that is leased or sold during a specific period,usually a year. Absorption typically is reported as a rate:
The number of units that become leased or sold during a certain period divided by the period. For example, 500,000 square feet(sf)of retail space absorbed during the previous 5 years is 500,000 divided by 5 = 100,000 sf per year. Specifically to calculate absorption, one needs the total unit of space occupied at the Beginning Of the Year(BOY) and the total units of space occupied at the End Of the Year(EOY).
The absorption formula is:
EOY Occupied units – BOY Occupied Units = Units absorbed
For example, consider a retail sub-market that has 850,000 sf of occupied retail space at the BOY. If 900,000 sf were occupied at the EOY, the absorption for this market would be 50,000 square feet.
However,the absorption rate calculation must be modified to include units added, removed, or vacated during this period of time. For example, If the available BOY total retail square feet was 850,000 sf and there was 25,000 sf of vacant space at BOY the total BOY occupied retail space equals 825,000 sf. Assuming 900,000 sf were occupied at the EOY the absorption rate would be 75,000 square feet.