Structure Depreciation and the Production of Real Estate Services

This study simultaneously analyzes the real estate production function and economic depreciation of structures by using data from Japan and the U.S. The estimated share of structure value is used to infer returns to scale, the land-structure substitution, and the structure depreciation rate. Real estate exhibits approximately constant returns in Japan, but decreasing returns in the U.S. Land and structures are gross substitutes in both countries. The land value ratio is 10% in Centre County, PA, but 60%-70% in Japan, reflecting the scarcity of land. The property depreciation rate is larger for newer and denser properties located further away from the downtown area in a smaller city. The structure depreciation rate corrected for a survivorship bias significantly varies by property type and country: approximately 7% for residential properties and 10% for commercial properties in Japan in contrast with 1% for residential structures in the U.S. These results serve as important inputs for macro, financial, urban, and real estate economic models