The pace at which a market leases or sells available space, lots or homes over a set period.
The OCC handbook defines the absorption rate as the rate at which available properties are leased or sold in a specific market during a given period, calculated by dividing the number leased or sold by the total number available. Example: 12 homes sold in a quarter out of 60 available is a rate of 20 percent for the quarter.
The figure drives three parts of a development or construction loan. Term: the handbook says extension options should be consistent with the expected construction time plus the projected absorption period. Spec limits: the expected absorption rate is an important consideration when a bank caps speculative units. Value: the feasibility study or the appraisal’s market analysis should support the absorption period for developed lots. If it does not, part of the tract should be valued as raw land.
The handbook also notes that custom homes and homes on larger lots often sell at a slower pace than tract homes. Bring local sales data that supports your pace.
How it shows up in the data here
No lender file measures absorption; it is a market figure that comes from an appraisal or a market study. Bank call reports show construction and land balances held on the report date. Lenders with those balances are at construction lenders, and lenders compared for tract work are under residential development comps. No sales pace, lease-up or project data for any lender is here.
Go further
- Residential development lenders: Lenders compared for lot and tract development.
- Deal summary builder: Turn the facts of a deal into a clean one-page summary you can copy or print. Nothing is saved or sent.
- Residential development loan package checklist: Lots and houses are repaid one sale at a time. A lender on a subdivision or a group of homes is underwriting how fast those sales will come and what happens to the loan if they slow down.
- Construction loan package checklist: A construction lender is lending against a building that does not exist yet. The package has to show what it will cost, who will build it, where every dollar comes from, and how the loan gets repaid when it is done.
Related terms
- Lease-up: The period after a building is finished or renovated while it fills with tenants and its income climbs toward a stable level.
- Spec home: A house built before any buyer has signed a contract for it, so the loan is repaid only when a buyer is found.
- Finished lots: Lots with streets and utilities in place, ready for a building to be started.
- Lot takedown: A builder's purchase of finished lots from a developer in batches on a set schedule, in place of buying them all at once.
- As-stabilized value: An appraiser's estimate of what a property will be worth on the future date it is projected to reach stabilized occupancy.
- Pro forma: A projection of a property's or project's future income, expenses and cash flow, built on stated assumptions and not on past results.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.