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Sunk Costs and the Measurement of Commercial Property Depreciation

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  • Diewert, Erwin

Abstract

This paper develops a new framework for measuring prices and quantities of commercial properties. In particular, it addresses problems associated with obtaining separate estimates for the land and structure components of a property. A key contribution is to address the problem of estimating structure depreciation taking into account the fixity of the structure. We find that structure depreciation is determined primarily by the cash flows that the property generates rather than physical deterioration of the building.

Suggested Citation

  • Diewert, Erwin, 2014. "Sunk Costs and the Measurement of Commercial Property Depreciation," Economics working papers erwin_diewert-2014-25, Vancouver School of Economics, revised 04 Jun 2014.
  • Handle: RePEc:ubc:bricol:erwin_diewert-2014-25
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    File URL: http://econ.sites.olt.ubc.ca/files/2014/06/pdf_paper_erwin-diewert-14-06-sunkcosts.pdf
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    References listed on IDEAS

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    1. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
    2. Jeff Fisher & David Geltner & Henry Pollakowski, 2007. "A Quarterly Transactions-based Index of Institutional Real Estate Investment Performance and Movements in Supply and Demand," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 5-33, January.
    3. Neil Crosby & Steven Devaney & Vicki Law, 2012. "Rental depreciation and capital expenditure in the UK commercial real estate market, 1993--2009," Journal of Property Research, Taylor & Francis Journals, vol. 29(3), pages 227-246, March.
    4. Diewert, Erwin & Shimizu, Chihiro, 2013. "A Conceptual Framework for Commercial Property Price Indexes," Economics working papers erwin_diewert-2013-44, Vancouver School of Economics, revised 09 Oct 2013.
    5. Erwin Diewert, 2009. "The aggregation of capital over vintages in a model of embodied technical progress," Journal of Productivity Analysis, Springer, vol. 32(1), pages 1-19, August.
    6. Timothy J. Dixon & Neil Crosby & Victoria K. Law, 1999. "A critical review of methodologies for measuring rental depreciation applied to UK commercial real estate," Journal of Property Research, Taylor & Francis Journals, vol. 16(2), pages 153-180, January.
    7. Sheharyar Bokhari & David Geltner, 2012. "Estimating Real Estate Price Movements for High Frequency Tradable Indexes in a Scarce Data Environment," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 522-543, August.
    8. Robert D. Cairns, 2013. "The fundamental problem of accounting," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 634-655, May.
    9. Schmalensee, Richard, 1989. "An Expository Note on Depreciation and Profitability under Rate-of-Return Regulation," Journal of Regulatory Economics, Springer, vol. 1(3), pages 293-298, September.
    10. W. Erwin Diewert, 2005. "Issues in the Measurement of Capital Services, Depreciation, Asset Price Changes, and Interest Rates," NBER Chapters,in: Measuring Capital in the New Economy, pages 479-556 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Diewert, W. Erwin, 2017. "Productivity Measurement in the Public Sector: Theory and Practice," Microeconomics.ca working papers erwin_diewert-2017-1, Vancouver School of Economics, revised 02 Feb 2017.
    2. W. Erwin Diewert & Kevin J. Fox & Chihiro Shimizu, 2016. "Commercial Property Price Indexes And The System Of National Accounts," Journal of Economic Surveys, Wiley Blackwell, vol. 30(5), pages 913-943, December.
    3. Erwin Diewert & Chihiro Shimizu, 2017. "Alternative Approaches to Commercial Property Price Indexes for Tokyo," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(3), pages 492-519, September.
    4. Diewert, Erwin, 2018. "Duality in Production," Microeconomics.ca working papers erwin_diewert-2018-2, Vancouver School of Economics, revised 06 Feb 2018.

    More about this item

    Keywords

    Property price indexes; net operating income; discounted cash flow; System of National Accounts; Balance Sheets; land and structure prices; goodwill a;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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