What is depreciation in real estate valuation?

Depreciation in real estate valuation refers specifically to a decrease in property value over time, often attributed to factors such as wear and tear, physical deterioration, economic obsolescence, or functional obsolescence. As properties age and endure use, their condition may decline, leading to a reduction in market value.

This concept is critical for appraisers and investors because understanding depreciation helps in accurately assessing a property's current value versus its original purchase price. By calculating depreciation, stakeholders can determine how much value a property has lost, which can inform future investment decisions or renovation needs.

The other options touch on related aspects of real estate valuation but do not define depreciation correctly. The idea of an increase in property value aligns with appreciation, not depreciation. Improvements to a property's initial worth relate to how renovations can boost value, but it does not address the loss in value characterized by depreciation. Lastly, while changing market conditions can affect property values, they are not synonymous with depreciation since those changes can also lead to appreciation in different circumstances.