Absorption Rate as a Tool for Assessing the Dynamics of Development Activity

Abstract

Research background: An assessment of the dynamics of the development of the housing market is critical for development activity and the institutions that finance it. Due to the capital intensity of development projects, it seems necessary to perform detailed analyses to be sure that the investment will find buyers and to know how much time it will take for this undertaking to be sold. The absorption rate reports it. Purpose: The aim of the article is, therefore, to verify the importance of the absorption rate in assessing the dynamics of property market development based on the example of housing development activity in Łódź. Research methodology: To achieve the aim, in the empirical part of the article, information on developers’ investments in Łódź was independently collected, and based on them, absorption ratios for several periods were estimated. Results: The study showed dynamic changes in the absorption rate, as well as its diversity depending on the type of building and location. That is why it is so important to analyze this indicator in developers’ activity, where the risk of recovering the capital engaged is very high. Novelty: In Poland, there are few publications on the given topic, and the existing analyses of the absorption rate in Poland, prepared for the largest Polish cities, do not include the division into specific locations or the type of real estate, which is why they are not sufficiently reliable information for developers.

Understanding the Effects of Market Volatility on Profitability Perceptions of Housing Market Developers

“…Other market trends, such as sale and rent price trends, the vacancy and absorption rates (i.e., how quickly new builds are rented or sold when completed), and land pricing options, can also influence developers' estimation of the generated revenue in their potential development projects (Antczak-Stępniak 2021;Huang 2020;Murray 2022). For instance, a local increase in housing and land supply can lead to a decline in absorption rates, which impacts the expected revenues from the project and could be a signal for developers to alter their decisions about land developments (Barer 2011).…”