What is economic obsolescence in real estate?

What is Economic Obsolescence in Real Estate?

Economic obsolescence refers to a loss in property value caused by external factors outside the property itself. Unlike physical obsolescence, which is due to the aging and deterioration of the property's physical structure, or functional obsolescence, which arises from the property's design or features becoming outdated, economic obsolescence stems from changes in the surrounding environment or broader economic conditions.

Common causes of economic obsolescence include:

  • Changes in zoning laws or land use that negatively affect the property’s value.
  • Increased crime rates in the area, leading to a less desirable living environment.
  • Development of new infrastructure or commercial projects that adversely affect the property, such as highways or industrial sites that increase noise, pollution, or traffic.
  • Decline in the economic vitality of the area, such as the closure of major employers leading to a decrease in demand for housing.
  • Shifts in market trends, like a move away from retail spaces due to the rise of e-commerce.

Economic obsolescence is often irreversible and out of the property owner's control. Property owners and investors typically monitor such external factors closely as they can significantly impact the investment’s return or a property’s appeal to buyers or renters.

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