Absorption Cost

Learn about absorption cost in Canadian real estate — what it includes, how it's calculated, and its role in pricing and planning.

Absorption Cost

June 27, 2025


What is Absorption Cost?

Absorption cost in real estate refers to the total cost per unit or square foot of space, including direct and indirect costs, that is recovered through rents or sales.

Why Absorption Cost Matters in Real Estate

In Canadian property development and management, absorption cost helps determine rental rates, pricing strategy, and project feasibility.



Components may include:
  • Construction and land costs
  • Financing costs
  • Marketing and leasing expenses



Understanding absorption cost supports accurate budgeting and financial planning.

Example of Absorption Cost in Action

The developer calculated the absorption cost of the new condo units to set pricing that would ensure project profitability.

Key Takeaways

  • Includes all costs recovered through sales or rent
  • Helps set rental rates or sales prices
  • Supports project financial planning
  • Accounts for direct and indirect costs
  • Key in development feasibility analysis

Related Terms

Additional Terms

Recourse Loan

A recourse loan is a type of loan where the lender can pursue the borrower’s personal assets, beyond the collateral, in the event of default.. more

Pari Passu

A pari passu clause is a contractual provision ensuring that multiple creditors share equally in repayment priority from the borrower’s assets.. more

Non-Recourse Loan

A non-recourse loan is a type of loan where the lender’s only remedy in case of default is to seize the collateral property; the borrower is not. more

Net Operating Income

Net operating income (NOI) is the total income generated by a property after operating expenses are deducted but before taxes and financing costs.. more

Mechanic's Lien

A mechanic’s lien is a legal claim by a contractor, subcontractor, or supplier for unpaid work or materials provided for a property.. more

Lis Pendens

Lis pendens is a legal notice filed in the land registry indicating that a property is subject to ongoing litigation that may affect its title.. more

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