One of the statistics most commonly used to gauge the state of the market is net absorption. But what is it exactly?
That depends on who you ask. Everyone is pretty much in agreement that net absorption is the net change in occupancy over a given period. That’s where the similarity ends.
There are different schools of thought on how to measure the change in occupancy. Should you count when a tenant physically moves in or out of their space? The advantage to this approach is that there is less volatility from quarter to quarter. A tenant signs a lease and will typically move into their new space six to eighteen months later. The move in and move out happen simultaneously.
What about counting when a tenant signs the lease and when a landlord first puts space onto the market? True, this is a more volatile but it does capture leasing activity in real time. At Jones Lang LaSalle we use this method.
While it is enticing to have true net absorption using the first approach, you miss out on the real time mood of the market. Take, for example, the recent Bain Capital lease in the Back Bay. The tenant agreed to take more than 200,000 square feet at the Hancock Tower during the second quarter in a move that significantly impacted the fate of this submarket. However, Bain Capital doesn’t plan to move in until the third quarter of 2011.
We captured net absorption the same quarter the lease was signed. Some of our competitors won’t register this change until this time next year.