What is external obsolescence in real estate?
What is External Obsolescence?
In real estate, External obsolescence is a reduction in property value due to factors outside the owner's control, such as neighborhood decline, local economic issues, or environmental problems. It is often incurable, as it stems from changes in the surrounding area or broader market conditions, like zoning laws or infrastructure developments. This type of obsolescence is key in property valuation and investment decisions, as it significantly affects marketability and profitability.
Here are some examples of external obsolescence in real estate:
- Proximity to Negative Influences: A property located near a landfill, factory emitting pollutants, or a noisy airport or railway line, which decreases its desirability and value.
- Economic Decline: A property in a region experiencing significant economic downturn, job losses, or closure of major businesses, leading to a reduced demand for real estate in the area.
- Overbuilding: A property in an area where excessive construction of similar properties leads to a surplus, causing property values to drop due to oversupply.
- Zoning Changes: A residential property negatively impacted by nearby commercial or industrial development due to changes in zoning laws, affecting its living environment and appeal.
- Infrastructure Changes: A property that loses value due to changes in traffic patterns, like the construction of a new major highway nearby, which increases noise and congestion.
- Social Changes: Changes in the neighborhood's social fabric, such as an increase in crime rates or a shift in the demographic profile, leading to a less desirable living environment.
- Environmental Factors: Natural risks like increased flooding or earthquake susceptibility due to environmental changes, making the area less safe and reducing property values.
These examples illustrate how external factors, often beyond the property owner's control, can significantly impact the value and attractiveness of real estate. The other two types of obsolescence are functional obsolescence and economic obsolescence, which we cover in this post.