How is depreciation measured in the Cost Approach?

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In the Cost Approach to valuation, depreciation is measured by estimating the loss in value attributable to factors such as deterioration, obsolescence, or external influences. This method recognizes that properties can lose value over time not just due to physical wear and tear, but also because of changes in market conditions or functional utility.

Deterioration refers to the physical decline of a property, while obsolescence can include economic or functional issues that render a property less desirable or effective. External factors might encompass changes in neighborhood dynamics or zoning laws that adversely affect the property’s value.

Understanding depreciation this way allows appraisers to make a more accurate assessment of a property's worth, factoring in all potential influences on value. This comprehensive approach supports the fundamental premise of the Cost Approach, which is to determine the cost to replace a property, adjusted for depreciation, to arrive at its current fair market value.