Which type of depreciation is characterized by a reduction in value due to outdated design?

The type of depreciation characterized by a reduction in value due to outdated design is functional depreciation. This form of depreciation occurs when an asset is less desirable because it has features that are considered obsolete or no longer efficient, even if the physical condition of the asset is still good. In the context of real estate, this could include properties that have features that do not meet current market expectations, such as a lack of modern amenities or layouts that do not conform to current buyer preferences.

Functional depreciation specifically addresses issues related to design, layout, or efficiency that diminish the value of the property in the eyes of potential buyers or users. This distinguishes it from other types of depreciation, such as physical depreciation, which relates to wear and tear or deterioration due to physical factors. Economic depreciation refers to a decline in value due to external market factors, such as economic downturns or changes in neighborhood dynamics, while structural depreciation generally relates to issues involving the building's physical structure rather than its functional aspects. Thus, functional depreciation is the correct answer as it directly relates to design and utility issues that impact value.