PSI - Issue 64

Benedetto Manganelli et al. / Procedia Structural Integrity 64 (2024) 1720–1726 B.Manganelli, P. De Paola, F.P. Del Giudice/ Structural Integrity Procedia 00 (20) 000 – 000

1721

2

1. Introduction The market value of a building is the sum of two components: the value of the land on which the building is located and the cost value of the structure (the built portion). The dynamics with which these two components of value evolve over time are certainly different. In a process of urban transformation, the land is attributed to the productive factor of land, thus being an original element, not derived from another productive process, and therefore not subject to amortization, but subject to the phenomenon of urban rent. The built structure is generated by Capital, Labor, and other services (provided by the State and the Construction Entrepreneur), and being derived from a productive process, it undergoes amortization. Amortization can be considered part of the depreciation of construction costs. Depreciation is indeed generated by a plurality of factors, which to varying degrees reduce the cost value of the building. These factors are all related to the inevitable passage of time, which can influence or determine the end of the service life of the building, or its economic useful life. There is a fundamental difference between the two concepts. The service life relates to the sphere of technical efficiency and therefore refers to the concept of amortization, while the economic useful life refers to the meaning of the economic efficiency of the asset, and therefore includes elements that do not solely pertain to physical or technical aspects. The human sphere is also involved, including needs, preferences, etc. When the economic useful life does not coincide with the service life, it is shorter than the latter, and it depends on the portion of depreciation not attributable to amortization. It should be noted that while both physical-technical and economic factors affect the depreciation of the built structure, only the economic sphere affects the phenomenon of rent or the dynamics of land value. The combination of the two value dynamics (land and structure) can determine a devaluation or a revaluation of the initial price. Therefore, it is crucial to distinguish between depreciation, always negative, which relates to the component of the structure, and devaluation (reduction in market value), which may or may not affect the entire property, including land and structure. This work, based on the logical interaction between the two phenomena of depreciation and rent, attempts to define a formal relationship capable of suggesting the potential threshold for demolition. In practice, it determines when it is more cost-effective to demolish and reconstruct the building. The work is organized as follows. The second section provides a review of case studies taken from the literature concerning the phenomenon of depreciation. The third section illustrates the analysis of economic feasibility by defining a demolition threshold, understood as the point at which it becomes economically viable to demolish and replace the building structure. Finally, in the fourth section, the conclusions of the work are drawn. 2. Literature Review The literature has generally discussed and analyzed the phenomenon of depreciation, giving it the meaning of devaluation of the market value of the property, connecting this phenomenon exclusively to time and without a distinction regarding the contribution that the built and land provide to the value dynamics. Malpezzi (1987), for example, in his work employs a hedonic model to measure the rate of economic depreciation in the residential market and its variability in space. The analysis shows that the age-price ratio in the different spatial areas investigated is not always of the same sign. The author justifies this variability by assuming that the dynamics of values can be conditioned not only by the effect of age on the built environment but also by how the market adapts to changes in supply and demand, thus implicitly invoking the phenomenon of rent. In the same work, he reports an analysis of the previous literature (12 works from 1942 to 1986) that indicates significant variations in estimates of depreciation rates for residential properties. The variation in results, according to the author, is essentially due to differences in the definition of depreciation used, in the models and data used for estimating the rates, and in some cases, to the conditions of the real estate market examined at the time of evaluation. Both Malpezzi and the majority of authors cited in his work have used hedonic models for estimating depreciation rates. Other authors have instead used the repeat sales model , originally proposed by Bailey et al. (1963) and subsequently extended by Case-Shiller (1987). This approach measures the price differentials of transactions for the same property that occur at different time periods, assuming that the property's characteristics and their implicit prices do not change between sales. Therefore, the perspective differs from the use of hedonic models. In this case, the focus is specifically on the phenomenon of rent, i.e., on the equilibrium and interaction between supply and demand, neglecting, however, the contribution that depreciation of the built part provides to the value dynamics. The main criticism of this approach is precisely related