May 29, 2024
By: Travis Watts, Director of Investor Development
Welcome back to Multifamily Investing 101. In this episode, Director of Investor Development, Travis Watts, breaks down what absorption rate means and why it is a vital measure in the real estate market.
What is Absorption Rate?
A metric that measures how many units are leased out within a specific property or market. In simple terms, it is a measure of demand.
- How in demand is the property?
- How in demand is this market?
Absorption rate is used by developers, investors, and analysts to gauge the demand and gain insight into current market conditions.
How is Absorption Rate Calculated?
Two key pieces of data are needed:
#1 The total number of available units on a property or in a market.
#2 The number of units that are occupied or leased out.
Simply divide the number of units occupied by the total number of available units over a specific period. For example, in a sub-market that has 1,000 rental units where 800 are occupied, the absorption rate would be 80%. Or in the example of a specific property that has 100 units and 90 are occupied, the absorption rate would be 90%.
Why is Absorption Rate Important?
Understanding this metric can help real estate investors make informed decisions. A high absorption rate, for instance, suggests a high demand for rentals in the area, potentially allowing the owner(s) to raise rents or achieve a high occupancy. Conversely, a low absorption rate might indicate overpricing or signal that there are other issues deterring potential renters. This could signal the need for rent reductions, concessions, or property improvements to boost occupancy.
This metric is a valuable strategic tool. Investors can use it to align with their investment goals. Some investors may purposefully target properties with low absorption rates, aiming to resolve any issues or buy a property at a discounted price. Others may prefer high absorption rates as they seek stabilized properties that offer immediate cash flow or have the potential for increasing rents. Each investor’s approach will vary based on their market position and objectives.
Using Metrics to Better Your Success
Investing wisely in real estate involves recognizing key metrics and knowing how to use them. The “Multifamily Investing 101” YouTube series is dedicated to educating investors on industry terminology and key metrics. In this series of short-form informative videos, we aim to provide you with a comprehensive understanding of concepts so you can better navigate your investing journey.
Whether you are a seasoned professional seeking to strengthen your knowledge or a newcomer looking to build a solid foundation, these videos can be an invaluable resource for you. If you are interested in partnering with us on best-in-class multifamily deals, check out Ashcroft Capital’s current offerings, or schedule a call with Investor Relations today.
