Rental Depreciation, Obsolescence and Location: The case of industrial Properties

The seminal empirical work in this area by Salway (1986) examined the depreciation of rental and capital values of offices and industrial units using the valuation of new and old notional standardised properties at June 1985. Baum (1991) extends the research by considering actual buildings: a study of 125 office buildings in the City of London and a study of 125 properties in an industrial estate to the west of London. However, his research still applies the professional judgement of surveyors (via a panel) to value properties. Baumís results are location specific, and indicate a lower rate of depreciation for industrial property than Salwayís ëaverageí. Salway (1986) found that most commercial buildings reached the end of their functional or economic lives well before they reached the end of their physical lives. Similarly Baum (1991) argues that depreciation is likely to be highest where land values are lowest. The basic premise of this paper is that depreciation/obsolescence will systematically vary by location and the paper sets out to assess the spatial dimension to these processes. It will reassess the property obsolescence and depreciation literature focusing on the impact of rents over time, and how they interact with local economic change, the structure of properties, and demand preferences. A number of hypotheses will then be tested empirically. The research method will be based on hedonic regression analysis with asking rents as the dependent variable and property characteristics as independent variables, following the approach set out by Dunse et al (2000). The data for the paper are derived from a database, developed by the University of Paisley, that comprises all properties on industrial estates in Scotland. The database in particular records information on asking rents, property characteristics which include age, type and location. The analysis will be focused on the Strathclyde area where there are a total of 3180 asking rent observations spanning the period 1994-2000.