Analysis of Economic Depreciation for Multifamily Property
2005, Journal of Real Estate Research
Jeffery D Fisher, Brent C Smith, Jerry J Stern, R Brian Webb
This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation for multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate for just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years - as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.
Fisher, Jeffery D., Brent C. Smith, Jerrold J. Stern, and R. Brian Webb (2005), ”Analysis of Economic Depreciation for Multifamily Property,” Journal of Real Estate Research, October-December, pp. 355-369.