Obsolescence and performance in the Central London office market

Abstract

The economic theory of obsolescence A vintage model Ever since the pioneering article by Bowie (1982), the issue of depreciation has attracted growing attention in the UK commercial property market. This paper revisits the issue, from the perspective of what economic theory has to tell us about obsolescence, before embarking on an empirical case study of the Central London office market. The chosen theoretical approach is based on the "vintage model" of investment developed by Salter (1966) in his seminal study of "Productivity and technical change". This theoretical framework provides a conceptual framework for the analysis, and some working hypotheses to test.The first point to note is that once an investment in capital goods has been made, they have no present cost. They are "the gift of the past", just as natural resources are "the gift of nature" (Salter, 1966, p. 61). The determinants of the economic life of installed capital goods are then purely the labour and materials costs of their operation compared to the price of the goods they produce. Once they no longer generate a surplus over operating costs, they become economically obsolete and are due for scrapping. Here the concept of economic obsolescence should be distinguished from that of physical deterioration. The former occurs at the point when capital goods can no longer be operated profitably. The latter involves the continuous process of "wear and tear", which can be accounted for by an additional component of the operating costs allocated to repair and maintenance.In Salter's vintage model, the process of obsolescence operates as follows (Figure 1). Each investment in new capital is assumed to embody an improved technique of production, which lowers the unit operating costs of successive vintages. The criterion for investment is that the present value of the surpluses generated by the capital goods over their economic life should be sufficient to cover the cost of the investment and pay a "normal" rate of profit. On this basis, the volume of investment in the latest technique is such as to replace those vintages which are being scrapped, and to expand overall output to the point at which its existing price p t is lowered to a new price p t+1 sufficient to eliminate the possibility of earning super-profits on the investment. With this price

Examining and quantifying the drivers behind alterations and extensions to commercial buildings in a central business district

“…Older buildings undergo more adaptation as time passes and it is not surprising to see age highly correlated with adaptation. Barras and Clark (1996) and Baum (1991) confirmed the correlation between time and obsolescence in buildings, demonstrating that as time passes some form of adaptation is essential to prevent a decline which otherwise can result in demolition.…”

“…Previous studies examining the criteria for building adaptation adopted a case study approach based on in-depth analysis of a relatively small sample of buildings (Austin, 1988;Barras and Clark, 1996;Ohemeng, 1996;Blakstad, 2001;Heath, 2001;Ball, 2002;Kincaid, 2002;Kucik, 2004;Arge, 2005;Remøy and van der Voordt, 2007). From these studies adaptation criteria were identified; however, the approach is 728 Wilkinson and Reed fundamentally different because of the detailed volume of data and the method used.…”

“…A landmark study observed a relationship between age and obsolescence in an examination of London offices Barras and Clark (1996). The work showed that as buildings age they become more prone to obsolescence which impacts on their capital and rental value.…”

A critical review of methodologies for measuring rental depreciation applied to UK commercial real estate

“…Hulten and Wykoff (1981a: 85) de® ne `economic depreciation' as a `decline in asset price due to ageing' . Previous property depreciation studies, with the exception of Barras andClark (1996, who built on Salter' s (1966) work), have tended to overlook this ® eld, which stems from the early work of Hotelling (1925), and is largely based on theoretical and empirical studies in the USA. Many of these studies have concentrated their efforts at a macro-scale level, and the debate has centred on the rate and pattern of depreciation to include in national income accounts and related tax allowances to re¯ect accurately the impact on real assets, such as plant and machinery and real estate.…”

“…Falling in¯ation during the early to mid-1980s had also concentrated fund managers' minds on the issue of depreciation, as it was no longer possible to mask the decline in relative property values due to depreciation (Baum, 1997). More recently, depreciation has continued during the 1990s (another period of low in¯ation and growth in the UK) to be a real issue, and one which is vital to consider in property valuation and investment appraisal (see, for example, Baum, 1991, 1997and Barras and Clark, 1996.…”