This study presents the formulation of a damage monitoring and evaluation method for building structures based on the measurement of Relative Story Displacements (RSDs) by noncontact-type optical sensors. The damage evaluation method is formulated to detect the damaged locations of structural elements and evaluate their damage degree based on the displacement loading analysis by the time histories of measured RSDs. Furthermore in the evaluation process, the analytical technique is introduced to compensate for the measurement errors associated with the properties of sensors. The monitoring accuracies are analyzed through numerical simulations on a model building subjected to a large earthquake. The results indicate the effectiveness of the proposed method in its applications to the Structural Health Monitoring (SHM) system.