Bokhari, S., & Geltner, D. (2018). Characteristics of depreciation in commerical and multifamily property: An investment perspective. Real Estate Economics, 46(4), 745-782.

Our first ever research note is from the Real Estate Economics journal Volume 46(4), pp. 745-782.  These research notes are designed to be shorter synopses of a scholarly journal highlighting the academic literature and current research study pertaining the real estate field.  Today’s study looks at depreciation from a different perspective. It makes sense that most of us care deeply about depreciation and the tax-advantages that it gives. And, for most us still, as long as depreciation is generating those advantages, we typically do not try and examine it any further.  However, the study’s authors (Bokhari & Geltner, 2018) suggest that taking a different perspective would add some great insight into the property’s performance, and, subsequently, your management strategy.

The article takes an investment perspective on depreciation – as opposed to the tax-policy perspective with which we are more familiar.  The Investment Perspective views depreciation as a fraction of the total property value and keeps its main focus on the cash flow and market value of the property.  The seminal metrics they refer to for investment performance are the IRR and holding period return; though your own preferred metrics apply, as well. qWhat is most important is that spotlight gets turned toward the property’s performance, and not necessarily numbers based upon federal tax policy.


Taking this perspective, then, involve incorporating three age-related drivers of property decline in your property’s real value:

Physical Obsolescence

this often the most observable, with the property mismanagement forcing the building into disrepair.

Functional Obsolescence

this occurs when a property’s value drops due to the functional components of the property becoming outdated, such as its design, style, amenities, technology, etc.

Economic Obsolescence

this is largely the drop in market value of your property due to external factors like traffic pattern changes, zoning changes, consumer sentiment, etc. You may also see this as the highest and best use for your site strays away from the intended use and towards  the demand being rflected in the economic environment.  One example would be office conversions into apartments.

Both FO and EO detract from the value of the structure – but not the value of the land. Which is why appropriately accounting for these can become difficult. In the end, the authors argue for a focus on depreciation oriented on total property value – including land value – rather than only relative to the remaining structure value. Doing so requires an understanding of the three areas of obsolescence; but also delivers a much more-accurate picture of the performance of the property and, thus, its value as an investment mechanism.

Thus, from the Investment Perspective, it is more appropriate to focus on DEP relative to total prop value including land value rather than only relative to remaining structure value.

By incorporating these drivers, past research has confirmed that apartment properties depreciate faster – though slightly – than their nonresidential commercial counterparts .  Further, depreciation is caused almost entirely by decline in the property’s current real income.  The rest of depreciation amount is typically accounted for by increases in Cap Rate.


The study further examines the real depreciation – which is basically the depreciation definition most of us utilize.  They define it as “the long-term or secular decline in property value, after netting out inflation due to the aging and obsolescence of the building structure – apart from temporary cyclical downturns in the market values, even after routine capital maintenance.” [page 746]

This can also be referred to as net depreciation as opposed to gross depreciation, which would include the cost of CAPEX on your property.

What becomes key to the investment perspective is that it includes the amount of capital growth an investor can expect over the long run.  Here, this perspective truly delineates itself from the tax-policy perspective, as depreciation is measured with respect to the property’s total value (and not merely the structure value) – which gets measures on cash flow and your market value metrics.  The tax-policy perspective, conversely, is limited to the historical cost-accrual accounting basis. This investment perspective on depreciation thusly varies with several variables including metro location, building type, structure age, etc. – where examining these become another intent of the current study.

Bokhari & Geltner (2018) also provide some historical context into the depreciation term, starting Taubman & Rasche (1969)’s model that takes a building’s value, subtracts the land portion, and progresses the value to a worth of zero after a typical window of 65-85 years of life. It defines a worth of zero to where the property has used up its highest and best use and is now fit for re-development. Or, more accurately, the property must undergo redevelopment to bring worth back onto the books.  Their concept of depreciation also included a rate that increased with the age of the building. Hulten & Wycoff (1981, 1996) later published work that became a foundation for the 1986 tax reform – and into the depreciation setup we have largely used since. They echoed the notion that depreciation typically hovers around 3% per year.  From this, they promoted a true straight-line method for capturing depreciation which is where we arrived at 27.5 years for depreciating apartment buildings and 31 years (later increased to 39 years) for nonresidential commercial buildings.


As mentioned before, metro location, building type, and structure age have long been tied to depreciation in the research literature.  Sanders & Randall (2000) viewed constant depreciation rates – based upon purchase price – as a function of structure age, as well – but was able to establish a specific range of rates from 2.1%/year for industrial properties to 4.5%/year for retail properties (office and multifamily properties were in between, with rates of 3.5% and 4%, respectively). A following Deloitte study estimated depreciation rates based upon gross rental income, where office properties depreciated at a rate of 1.7%/year and retail declining about 2.7%/year (industrial properties were 1.9%/year and multifamily was not included in the study).

Ultimately, at least for tax considerations, commercial properties tend to depreciate in a more geometric-pattern (as opposed to a linear, x=y-type pattern) and mostly around a rate of 2%-4%/year. Again, and most notably here, apartment building properties consistently experience a faster rate of depreciation than do non-residential commercial properties – however slightly.

Finally, because the investment perspective advocates a total property value view, it becomes even more important to understand – or be able to account for – the two main avenues through which value decline may be attributed:

  1. Decline over time in real NOI that the property is able to generate (with EO obviously a major driver) and
  2. Increase over time in the Cap Rate that the property asset market applies to the property as it ages.

Any depreciation resulting from an increase in the cap rate with building age (what is commonly referred to as “Cap Rate Creep” could result from either an increase in the market opportunity cost of capital (OCC), a decrease in expected future growth rate, or a combination of both.


The current study utilized data from the RCA Database with property transactions from 2001-2014. After filtering and cleaning the data, the study was left with a total sample size of 107,805 transactions.  This included 80,431 nonresidential commercial properties, 27,374 apartment property transactions, and a subsample of properties across the Top 25 metropolitan area markets (studied separately). Results largely echoed the sentiment from past research not utilizing the investment perspective.  Property values tended to decline in real terms with building age, but at a declining rate. Interestingly, this keeps supporting the U.S. tax policy approach where apartments are scheduled to depreciate at 27.5 years, and nonresidential commercial properties at 39 years. 

Possibly the most clear finding was the non-linear rate at which properties depreciate slower as the buildings age. Because of this, investment teams need to have clear strategies for reversing – or at least navigating through – the factors of physical, economic, and functional obsolescence. For example, full exhaustion of depreciation suggests that economic obsolescence spiraled over high land value and a dynamic metropolitan area where the highest and best use of that location escalated over a few decades. Thus, your plan as an investor must take this future-threat into account and mitigate the impact with a built-in strategy.  Conversely, depreciation rates are lower in metropolitan areas that are bound by physical constraints to development. Basically, this would be in a less-dynamic environment and the escalation of EO would be slower, or even minimal.

In conclusion, it is noteworthy that depreciation – from an investment perspective (a truer reflection of the property’s performance as an investment) varies on a number of factors.  First, depreciation is greater in younger properties. This most likely results from the typical share of land value and building structure values in overall property value.  And while the standard U.S. tax policy accounts for 27.5 year schedule in apartments – for example – tax policy also echoes this aggressive depreciation approach with the use of bonus depreciation and cost-segregation, as examples. Second, depreciation also varies across metropolitan areas. As we know through investment factors that affect NOI and valuation, effective rent growth, cap rates, vacancy rates, absorption rates, among others all impact NOI and/or valuation, and vary significantly by metropolitan area.  Municipal policies also impact your investment, for example, as areas with lower development supply elasticity, especially places, with physical land constraints, have lower depreciation rates. Place with large land availability and less development constraints have higher average depreciation rates.

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