Structure Depreciation and Returns to Scale of Real Estate∗

This study analyzes the real estate production function and economic depreciation of structures by using data from Japan and the U.S. Real estate exhibits decreasing returns in the U.S. but constant returns in Japan. Land and structures are substitutes in both countries. The property depreciation rate is larger for newer and denser properties located away from the Central Business District (CBD) in a smaller city. The property depreciation rate decreases with age and is always smaller than the structure depreciation rate due to the effect of non-depreciating land component and a survivorship bias. The bias-corrected structure depreciation rates are significantly larger in Japan: 6.4%-7.0% for residential properties and 9.1%-10.2% for commercial properties in contrast with 1.5% for residential structures in the U.S. The distribution of depreciation rates also varies significantly by property type. The land value ratio is 60%-70% in Japan but 10% in Centre County, PA, reflecting the scarcity of land. JEL Classification: E01; R21; R33; E20