3 Types of Property Obsolescence

Over time a commercial property may go up or down in value. Some properties are well-maintained, in a great location, and eventually even added to registers of historic places. However other property owners are not so fortunate. The value of their commercial real estate takes a dive due to some form of obsolescence.

When referring to commercial real estate, obsolescence is defined as any reason for a decrease in property value. There are three primary types of obsolescence that may affect the value of a commercial property. They are:

PHYSICAL DETERIORATION – This type is just what it sounds like – deterioration to the physical structure itself. The two primary causes of physical deterioration are age and wear & tear. Both causes result in the depreciation of the value of the property from what it was valued before the deterioration took place.

FUNCTIONAL OBSOLESCENCE – If a commercial property is no longer able to function in the way that it was originally intended, such as an apartment building that is no longer fit for human residence then it loses value. Another form of functional obsolescence is a technical component in which the function becomes obsolete and the operating costs are more than the incoming capital.

EXTERNAL OBSOLESCENCE – This type of obsolescence occurs when some outside force affects the commercial real estate property. For example, if the neighborhood around the property goes downhill, then the value of the commercial property will go downhill as well. The other primary factor is economic, and occurs when the owner of the property is no longer able to do business in a way that offers a fair return on investment.

The person in charge of determining value of the property will gauge the obsolescence based on various forms of data. These may include historic and financial documents, comparisons of similar properties in nearby locations, and the average selling price of similar commercial real estate within the same, basic geographical area.

Finally when determining value, the person responsible for the task might also take into account the value of goods produced or services rendered in relationship to the property, if applicable. And before the final value of the property is given, things like zoning laws, foreclosure, and the property not meeting certain safety codes may also come into play.