Journal of Real Estate Finance and Economics, 26:1, 47±63, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Coping with Technological Change: The Case of Retail
PETER F. COLWELL
University of Illinois at Urbana-Champaign, 1407 W. Gregory Dr., Urbana, IL 61801, USA
MAXWELL O. RAMSLAND, JR.
Ramsland & Vigen, Inc., 600 Lonsdale Building, Duluth, MN 55802, USA
Functional obsolescence in real estate occurs because of technological change. A theoretical model suggests that
the early years of building life are characterized by functional obsolescence that is undiminished by reinvestment
(``cures'' in appraisal terminology). Later, observable functional obsolescence is eliminated by cures. A national,
proprietary data set consisting of department store sales is utilized to test these propositions. The test is structured
within a hedonic model in which the effect of age represents functional obsolescence and technological change,
while other variables control for physical condition and location quality. The empirical results do not permit the
rejection of the hypotheses developed from the theory. The measured rate of techological change in retail real
estate is 1.7 percent per annum.
Key Words: technological change, functional obsolescence, retail, department stores
Technological change in the retail sector has important real estate dimensions. It is not
dif®cult to develop a list of some of the more important technological changes affecting
retail. The general store, the department store, the downtown, structural steel, the elevator,
the escalator, catalog shopping, automatic doors, the parking lot, security cameras, the
suburban mall, vendor trade ®xtures, TV shopping, internet shopping, computerized
inventory control, the big box, and the even bigger box would be included on any such list
(Eppli and Benjamin, 1994, 23±24). Some of the more modern accoutrements might
include wiring for internet access. There are, of course, other dimensions of technological
change in retail, including contract innovations like percentage leases, CMBSs, and
REITs. There are also innovations in the use of labor and in product use instructions, such
as live demonstrations and videotapes.
Signi®cant features of the department store market are developed in this article.
Foremost among these is the fact that department stores do not respond to technological
changes in a continuous fashion. Instead, they appear to remain essentially unaltered
during their ®rst decade and a half of life. Thereafter, they appear to nearly keep up with