Characteristics of Depreciation in Commercial and Multifamily Property: An Investment Perspective

Sheharyar Bokhari and David Geltner

Real Estate Economics, 2018, vol. 46, issue 4, 745-782

Abstract: This article reports empirical evidence on the nature and magnitude of real depreciation in commercial and multifamily investment properties in the United States. The article is based on a much larger and more comprehensive database than prior studies of depreciation in such properties, and it is based on actual transaction prices rather than appraisal estimates of property or building structure values. The article puts forth an “investment perspective” on depreciation, which differs from the tax policy perspective that has dominated the previous literature in the United States. From the perspective of the fundamentals of investment performance, depreciation is measured as a fraction of total property value, not just structure value, and it is oriented toward cash flow and market value metrics of investment performance such as internal rate of return and holding period return. Depreciation from this perspective includes all three age‐related sources of long‐term secular decline in real value: physical, functional and economic obsolescence of the building structure. The analysis based on 107,805 transaction price observations finds an overall average depreciation rate of 1.5%/year, ranging from 1.82%/year for properties with new buildings to 1.12%/year for properties with 50‐year‐old buildings. Apartment properties depreciate slightly faster than nonresidential commercial properties. Depreciation is caused almost entirely by decline in the property's current real income, only secondarily by increase in the capitalization rate (“cap rate creep”). Depreciation rates vary considerably across metropolitan areas, with areas characterized by space market supply constraints exhibiting notably less depreciation. This is particularly true when the supply constraints are caused by physical land scarcity as distinct from regulatory constraints. Commercial real estate asset market pricing, as indicated by transaction cap rates, is importantly related to depreciation differences across metro areas.

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://doi.org/10.1111/1540-6229.12156

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:reesec:v:46:y:2018:i:4:p:745-782

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1080-8620

Access Statistics for this article

Real Estate Economics is currently edited by Crocker Liu, N. Edward Coulson and Walter Torous

More articles in Real Estate Economics from American Real Estate and Urban Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().