What leads to functional obsolescence in real estate?

Functional obsolescence occurs when a property becomes less desirable due to changes in consumer preferences, design standards, or functional utility that do not meet current market expectations. This typically arises from poor design or outdated features that may not align with what buyers or tenants are looking for in a property. For example, a home with a layout that is inefficient or impractical, such as having too many small rooms instead of an open floor plan, can result in functional obsolescence. The loss of utility in this way means that the property does not serve its intended purpose effectively, leading to decreased market value.

The other options do not describe factors that lead to functional obsolescence. A reduction in local tax rates might have a positive effect on property values or marketability. Site deterioration refers to physical decline of the property’s surroundings or site but does not specifically relate to the property's design or functionality. An increase in demand for property typically enhances value rather than detracting from it, as it suggests that more buyers are interested in acquiring properties in the area.