What is obsolescence in real estate?

Obsolescence in real estate refers to the loss of value of a property that occurs due to economic or functional factors. These factors can include changes in market preferences, economic downturns, or the physical condition of the property becoming outdated in comparison to newer developments. For instance, a building that lacks modern amenities or is situated in a declining economic area may lose value as potential buyers and tenants seek more updated options.

This loss of value can be attributed to either economic obsolescence, which is influenced by external factors such as changes in the neighborhood or broader economic conditions, or functional obsolescence, which pertains to an inadequacy within the property itself, such as outdated layouts or insufficient systems. Understanding obsolescence is crucial for real estate professionals as it directly impacts property valuations and investment decisions.