Understanding Multifamily Lingo : "Absorption Rate"Apr 03, 2020
This is what we need to take into consideration when we are doing a value add, kicking people out, cleaning up the units, increasing the rents and putting it back on the market. Find out how to get the absorption rate in that marketplace. You better know what you're talking about especially when you are speaking to your investors!
You need to know, in your calculations for determining the cost of this value add proposition, what is the absorption rate in that particular community. That's the amount of time it takes for a new unit to be absorbed into the market and by a tenant.
You have to determine how long it takes for a new unit to be leased up by another tenant. If it sits on the market for four months or if it is showing a four month absorption rate, you've got to figure that into your calculation.
Once the deal is closed and once that unit is put back on the market, you’ve got to hold that unit for four months in order to find the right tenant. And it's not your fault!
You can go out there and do all the marketing you want, but that absorption rate is unique to every market and it's not unique to every property. You have to understand what the absorption rate is in your marketplace.
One of the best places to find this type of information, is in the Marcus & Millichap research reports on their research site. You go into the MSA that you're looking in and it's typically on the fourth page of the four page report. It will tell you exactly what the absorption rate is in that marketplace.
So, that way you can understand exactly how long it's going to take you to turn those units and how long it's going to take for that value add deal to happen. Now, if you're out there selling your deal to a savvy investor, trying to raise private money and they ask you the question, "What's the absorption rate?" You better know what they're talking about!