PROJECT ABSORPTION FORMULA

Calculation of Project Absorption is necessary in order to develop the absorption and revenue schedule for a real estate development project.

The absorption for a particular real estate development project A_i, either residential or commercial, can be calculated using the fair market share formula:

A_it = MS_it × CPI_it × MD_t

Where:
A_it = Absorption of project i in period t
MS_it = Fair Market Share for Project I at time t (see below how is calculated)
CPI_it = Competitive Position Index for project i at time t
MD_t = effective demand for product developed in project i at time t, in the city or metropolitan market within the project competes

The project’s fair market share (MS_it) can be calculated using the following formula:

(MS_it) = S_it /CS_itWhere:
S_it = size of project i in number of units or square feet
CS_t = competing supply for the particular product that is being build in period t

The project’s CPI (Competitive Position Index) is estimated by identifying all competing projects, developing amenity indices for each project (that take into account structure, project and location advantages and disadvantages), as well as the subject property’s amenity index (AI_i), and estimating the average amenity index (AAI) for all competing projects. The project’s CPI then can be calculated as:

CPI_i = AI_i /AAI

For example, a CPI of 1.063 would indicate that the subject development is estimated to be by 6.3% better than the average competing project.

Application of the Project Absorption Formula

In order to demonstrate the application of the project absorption formula let’s make the following assumptions:

Project CPI = 1.063Project size = 150 unitsCompeting Supply = 15,000 unitsEffective Market Demand (MD) = 12,000

Given this data project absorption can be calculated as:

A_i = (150/15,000) × 1.063 × 12,000
= 0.01 × 1.063 × 12,000 = 127.56 =127 units

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