How might a property experience depreciation due to functional obsolescence?

Functional obsolescence refers to a reduction in the value of a property caused by its design or layout becoming outdated or less useful compared to current standards or preferences. When a property has outdated design features or a poor layout, it can deter potential buyers or renters, resulting in a depreciation of its market value. For example, a home with inadequate room sizes, inefficient use of space, or outdated fixtures may not meet modern expectations, leading to a diminished attractiveness in a competitive real estate market.

In contrast, being located in an area with high demand typically enhances a property's value, while increasing neighborhood property values generally reflects a positive trend, and renovations that improve a property tend to boost its value rather than contribute to depreciation. Therefore, the core reason functional obsolescence leads to depreciation is tied directly to design and layout issues rather than external market conditions or improvements made to the property.