Analysis of Economic Depreciation or Multi-Family Property

Jeffrey Fisher, Brent Smith, Jerrold Stern and R. Webb

Journal of Real Estate Research, 2005, vol. 27, issue 4, 355-370

Abstract: This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation or multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate or just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years—as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.

Date: 2005
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DOI: 10.1080/10835547.2005.12091165

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