What Is Depreciation?

What Are the Different Types of Depreciation?

In real estate appraisal, the value of a building can decrease over time or due to certain conditions. This decrease, called depreciation, falls into three main types: physical, functional, and economic.

Physical Depreciation

This refers to the loss of value due to normal wear and tear and the age of the building. It includes material deterioration, obsolescence of systems, and the repairs needed to keep the building in working condition.

Functional Depreciation

This depreciation results from limitations in the building's design, layout, or equipment compared to current standards. For example, an outdated floor plan, inadequate installations, or obsolete technology can reduce the property's value.

Economic Depreciation

This is the loss of value due to factors external to the building, such as neighborhood deterioration, proximity to nuisances, or regulatory and economic changes that affect the attractiveness and use of the property.