What are the components of depreciation in real estate?

Depreciation in real estate refers to the reduction in the value of a property over time, and it can arise from multiple factors. The correct answer highlights two critical components: economic obsolescence and physical deterioration.

Physical deterioration encompasses the wear and tear that a property experiences due to age and use. This can include issues such as peeling paint, roofing problems, and outdated plumbing. As these physical aspects decline, the overall value of the property is impacted, leading to depreciation.

Economic obsolescence, on the other hand, refers to external factors that negatively affect a property’s value, independent of its physical condition. Examples include changes in local zoning laws, the arrival of undesirable developments nearby (like factories or highways), or shifts in the neighborhood's demographic trends. Such factors can reduce demand for the property, thereby contributing to its overall depreciation.

Together, these components illustrate that depreciation is not merely about the physical aspects of a property, nor can it be attributed solely to market demand or upgrades. Instead, it is a multifaceted concept that accounts for both internal and external influences on property value.