What does 'economic obsolescence' refer to in property valuation?

Economic obsolescence is a critical concept in property valuation that pertains to the reduction in a property's value caused by external factors that are typically outside the control of the property owner. This can include elements such as changes in the neighborhood, such as increased crime rates, the construction of undesirable infrastructure nearby, or shifts in market demand that diminish the desirability of the location.

In contrast, the other concepts outlined refer to different types of depreciation. Physical deterioration involves the wear and tear on a property itself, which can be attributed to aging or lack of maintenance. Loss of value due to poor design is associated with the property's layout or architectural features that make it less appealing. Similarly, a decrease in value due to interior upgrades suggests that improvements might not align with market preferences or could lead to over-improvement, where the cost of the upgrades exceeds the value they add.

Understanding economic obsolescence is essential for accurate property appraisal because it highlights the importance of external market dynamics in determining property values.