Final answer:
Loss of value in property due to any cause is known as depreciation. It occurs due to factors like aging, market changes, and neighborhood decline, often leading to property abandonment and business exits in the long run due to sustained losses.
Step-by-step explanation:
In appraisal, loss of value in a property from any cause is referred to as depreciation. This can occur from a variety of factors, including the natural aging of a property, changes in market demands, or neighborhood decline. For instance, as homes age, they may become less desirable due to the need for maintenance or being out of style. As a result, individuals with the financial means might opt for capital flight, relocating to newer areas and leaving behind older homes. These properties tend to become rentals, which may not be as well-maintained, leading to further depreciation in value. Government incentives for rental property owners can exacerbate this by compensating for depreciation, thus inadvertently supporting disinvestment. When rental income fails to cover maintenance and tax costs, properties may be abandoned, further diminishing the value of neighboring real estate and potentially leading to a death spiral of property values throughout the community.
Businesses experience a similar dynamic, wherein sustained losses instigate a process known as exit. In the short term, a business may continue to operate despite losses if it can cover variable costs, but long-term losses will lead to a reduction in production or a total shutdown of operations. This is particularly true for firms that experience a sustained pattern of losses, often resulting in the abandonment of business ventures, adding to the overall decline of the area.