Coping with Technological Change: The Case of Retail

Functional obsolescence in real estate occurs because of technological change. A theoretical model suggests that the early years of building life are characterized by functional obsolescence that is undiminished by reinvestment (“cures” in appraisal terminology). Later, observable functional obsolescence is eliminated by cures. A national, proprietary data set consisting of department store sales is utilized to test these propositions. The test is structured within a hedonic model in which the effect of age represents functional obsolescence and technological change, while other variables control for physical condition and location quality. The empirical results do not permit the rejection of the hypotheses developed from the theory. The measured rate of techological change in retail real estate is 1.7 percent per annum.