Commercial Buildings Capital Consumption and the United States National Accounts

• Published date: 01 September 2019
• Author: Sheharyar Bokhari,David Geltner
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/roiw.12357

COMMERCIAL BUILDINGS CAPITAL CONSUMPTION AND THE

UNITED STATES NATIONAL ACCOUNTS

by Sheharyar Bokhari

MIT Center for Real Estate

and

David Geltner*

MIT Department of Urban Studies and Planning

Commercial buildings are a major asset class, over30 percent of the value of the stock of all produced

assets according to the BEA. Yet,US commercial buildings depreciation has not been comprehensively

studied since the highlyinfluential work of Hulten and Wykoff almost 40 yearsago. This papers major

contributions include: (i) More flexible and precise estimation ofthe net depreciation value/age profile,

allowing much finer characterization of the building life cycle; (ii) Explicit quantification of the land

value component of commercial property value, enabling net depreciation to be quantified as a

fraction of remaining structure value; (iii) Inclusion of capital improvement expenditures, allowing

estimates of “gross depreciation” (total capital consumption); and (iv) Implications of the papers

findings to and for the national accounts.

JEL Codes:E01,R33 and H25

Keywords: commercial buildings, capital consumption, depreciation, land value

1.INTRODUCTION AND DEFINITIONS

Commercial property, including private multi-family rental housing

(apartments), is a huge asset class in the United States.

1

As of 2013 the Bureau of

Economic Analysis (BEA) National Balance Sheet listed over $16 trillion net

worth of nonresidential structures valued at current cost, over 30 percent of the

Note: We would like to thank Real Capital Analytics Inc., The National Council of Real Estate

Invesetment Fiduciaries (NCREIF), and Green Street Advisors Inc. for providing the data for this

study. We also acknowledge helpful feedback on an earlier draft of this Report from Ryan

McCormick (RER), Erwin Diewert (UBC) and Glenn Mueller (UD), and Robert Kornfeld (BEA).

We also thank the Real Estate Roundtable (RER) and NAREIT for sponsoringa portion of this

research. Finally, we would like to thank three anonymous reviewers at the ROIW.

*Correspondence to: David Geltner, MIT Department of Urban Studies & Planning;

77 Massachusetts Ave.; Massachusetts Institute of Technology; Cambridge, MA 02139, USA

(dgeltner@mit.edu).

1

While the present study focuses primarily on income-producing (investment) property, much so-

called “corporate real estate” (owner-occupied commercial property) is physically and operationally

very similar to income property,such that it is probably reasonable to believe that the structure depre-

ciation characteristics are similar. In fact, approximately 9% of our RCA transaction price sample on

which our net depreciation analysis is based, consists of owner-occupied commercial properties.

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C2018 International Association for Research in Income and Wealth

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DOI: 10.1111/roiw.12357

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Review of Inc ome and Wealth

Series 65, Numb er 3, September 2019

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value of all the produced assets on the National Balance Sheet.

2

Commercial

buildings annual depreciation is over $300 billion in the National Income &

Product Accounts. In spite of this large importance, the nature and magnitude of

the capital consumption of US commercial structures has not been much studied.

The most influential work was done almost 40 years ago, based on a Treasury

Department survey of property owners taken in1972.That studyignoredcapital

improvement expenditures and apartment buildings.

3

Commercial building depreciation enters into the national accounts in three

major ways. First, depreciation enters the income and product accounts directly

as capital consumption, a negative item differentiating Net Domestic Product

from Gross Domestic Product. Second, depreciation enters the National Balance

Sheets indirectly through the Perpetual Inventory Method (PIM), in which a

starting quantity of fixedassetsis reducedby depreciation each year. Third,as the

National Balance Sheet is completed by the addition of land value accounts,

depreciation can be a useful input for the derivation of land price indices useful

for updating such accounts, based on commercial property transaction price

indices.

In the present paper we first update, improve and extend the previous empiri-

cal analyses of commercial property depreciation in the United States. Then we

provide some discussion of the implications of our findings for the national

accounts. We are able to study a combined database of over 120,000 transactions

of commercial buildings and development sites, and over 17,000 property records

of capital improvement expenditures, spanning 2001–14. This is over ten times

larger than any previous study of commercial property capital consumption. The

paper makes four major contributions to the previous published literature

include. First, we are able to conduct a more flexible and precise estimation of the

net depreciation value/age profile, allowing much finer characterization of the

building life cycle. Second, we present an explicit quantification of the land value

component of commercial property value. An interesting contribution in its own

right, this also enables our net depreciation findings to be quantified as a fraction

of remaining structure value (not just whole property asset value including land).

Third, this is the first paper to include findings on the magnitude of capital

improvement expenditures. This allows estimates of “gross depreciation” (total

capital consumption), which includes the cost of capital improvements aswell as

“net depreciation” (which is the loss in real value as a function of structure age

even after and including capital improvements). Finally, we discuss the implica-

tions of our findings for thenational accounts, including BEA quantificationof

capital consumption and commercial structure fixed asset value in the National

Balance Sheets.

The remainder of the paper is organized into eight sections. We begin with a

threshold discussion of conceptual definitions, followed in Section 3 by a literature

review and Section 4s description of the data. Sections 5 and 6 present our net

depreciation and capital expenditure findings, in that order. Section 7 combines the

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Bureau of Economic Analysis (2015).

3

Hulten and Wykoff(1981a,1981b)

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Review of Income and Wealth, Series 65, Number 3, September 2019