Commercial Building Capital Consumption in the US
This report presents the findings of an analysis of the nature and magnitude of capital consumption in commercial property structures in the United States. Capital consumption refers to the total cost of the usage and aging of the built asset, including both capital improvement expenditures plus net depreciation, which together equal “gross depreciation.” Commercial properties represent a huge asset class, worth over $20 trillion (as much market value as the entire NYSE). Yet their depreciation has not been comprehensively and rigorously studied since the highly influential work of Hulten and Wykoff almost 40 years ago. The present analysis is based on a combined database of income producing commercial investment properties, including multi-family rental residential properties (apartment buildings) as well as the main core sectors of nonresidential commercial property: office, industrial (warehouse), and retail (hotels are not included). The database has been contributed by Real Capital Analytics Inc (RCA), the National Association of Real Estate Investment Fiduciaries (NCREIF), and Green Street Advisors (GSA). This is by far the largest and highest quality database of commercial property assets ever studied regarding depreciation, dwarfing the data used by Hulten and Wykoff. The analysis of net depreciation is based on over 100,000 transaction prices of commercial properties primarily from the RCA database. The analysis of capital improvement expenditures (“capex”) is based on operating data from NCREIF and GSA. In combination with data on demolished buildings and other indications regarding land value fractions, statistical analysis of transaction prices is used to infer net and gross depreciation rates as a fraction of remaining structure value and as a function of building age. The focus of the study is on economic depreciation, not accounting or tax policies. Overall, we find net depreciation rates per year around 1.7% of property value and 3.1% of structure value for nonresidential property, and for apartments 2.0% of property value and 3.9% of structure value. The corresponding rates for capex are 1.8% of property value and 3.5%of structure value for typical commercial properties, and for apartments 2.4% and 4.9% of property and structure value respectively. The sum of these are the per annum gross depreciation rates: 3.5% of property and 6.7% of structure value for commercial; 4.4% of property and 8.8% of structure for apartments. These rates suggest close to $700 billion in investment property capital consumption per year in the U.S., four percent of the GDP. The capex rates would likely be noticeably greater if we could include expenditures on major renovation projects, which are missing in our data. We find the typical building value/age profile suggests a rather anthropomorphic life cycle, with three stages: “Youth” (1-30 years old), “Middle Age” (30-65 years), and “Old Age” (65-100 years). Net depreciation is highly accelerated during the building’s youth. Middle-age is characterized by little net depreciation (though capex rates increase). Old age sees the final decline to just land value (ripe for demolition/redevelopment) to complete the property life-cycle at an overall average age around 100 years.