Functional Or External Obsolescence?

[Ken B]

A property located in the pathway substantial growth has building improvements which no longer contribute to overall value because land values have increased substantially in recent years. The highest and best use of the property is to redevelop with a more intensive use and the most probable purchaser is a developer who would raze the existing single story retail structure and redevelop the site with a high-rise residential project. Although the building improvements have relatively little physical depreciation, they no longer contribute to overall value.

Is the loss in building value due to external obsolescence as a result of changing market forces or functional obsolescence related to improvements which are deficient in design compared to the perfect improvement for the site?

Or are there other forces at play?

 

[Tim The Enchanter]

The location is good, but the improvements are far from H&B use.
Sounds functional to me, no external problems.

 

[NachoPerito]

Functional

From The Appraisal of Real Estate 13th Edition:

Functional obsolescence is caused by a flaw in the structure, materials, or design of the improvement when compared with the highest and best use and most cost-effective functional design requirements at the time of appraisal.

 

[Terrel L. Shields]

Is the loss in building value due to external obsolescence as a result of changing market forces or functional obsolescence related to improvements which are deficient in design compared to the perfect improvement for the site

That has always been an issue, and in my opinion it is economic obsolescence. The original design of the building is not flawed but the market forces have changed and the ideal building for the site is now different...

Some authors (Betts & Ely for instance) say that most frequently appraisers favor calling it functional obsolescence even though the defect was not in the original design. Personally I like the term "economic obsolescence" as one of the three versions of external obsolescence that occurs (Locational and Environmental being the others).

 

[hastalavista]

I differ from my learned friend, Terrel, and would attribute it to functional.

Economic obsolescence is incurable but usually temporary. If you've had a change in H&BU, that is not temporary. Functional obsolescence better describes the dynamic.

 

[Michigan CG]

Economic is the same as external, forces outside of the site but not the improvements on the site. It is functional.

 

[Blueprint]

It is clearly functional. The current improvements do not provide a return

Although the building improvements have relatively little physical depreciation, they no longer contribute to overall value.

I know I am not there or of your caliber, but it does seem like you answered your own question with a perfect example of functional obsolescence.

 

[Blueprint]

OP, would love to know you think the loss in value is due to external obsolescence.

 

[Ken B]

Oh, I know it is functional. I do a lot of reviews these days and someone else asserted it was external. I was trying to see if there was a school of thought in that regard.

 

[Gobears81]

Oh, I know it is functional. I do a lot of reviews these days and someone else asserted it was external. I was trying to see if there was a school of thought in that regard.

I think that there was a similar discussion a few weeks ago, but I can't remember which thread. I've found functional and external obsolescence are not always exclusive, although I think it was Denis that had a good answer for the two being exclusive.