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Abstract
This article is the winner of the Industrial Real Estate manuscript prize (sponsored by Society of Industrial and Office REALTORS) presented at the American Real Estate Society Annual Meeting.
This article examines the effects of environmental contamination on the sales prices of industrial properties. Two general questions are addressed. The first is the extent to which sales prices may be impacted by contamination. The second is whether sales price effects due to contamination persist subsequent to the remediation of previously contaminated industrial properties. Using data on industrial property sales in Southern California, this study estimates sales price models that address these two questions. The results show that there are statistically significant impacts on property values in the period before and during remediation, but that these effects dissipate subsequent to cleanup.
Introduction
Environmental risk for industrial properties reflects the investment and lending risk related to uncertainties concerning cleanup requirements, liabilities and other factors. The effect of these risk factors is sometimes referred to as "stigma." Stigma has been most frequently discussed in the real estate appraisal literature (Patchin, 1988; and Mundy, 1992). As this type of risk increases, income is discounted or capitalized through higher required rates of return into lower prices and values (Jackson 1998). In addition to stigma related risk effects, industrial property prices may be directly reduced by estimated remediation costs that are to be paid from future property cash flows (Jackson, 1997). The price models in this study focus on the effects of environmental risk, although for some properties price reductions could reflect both risk and cleanup cost effects. Indeed, uncertainty about unknown future costs, and liabilities for such costs, can create risk effects. Risk effects are also related to uncertainties about potential changes in regulatory compliance requirements, potential third party claims and liabilities due to off-site migration of contamination, and other factors.
Literature Review
Relevant literature for this research falls into two categories. The first category includes the empirical studies of price impacts on industrial and other nonresidential properties due to environmental contamination. Price impacts are measured through the use of case studies in most of these studies. In only two studies are statistical techniques used to quantify the effects of adverse environmental conditions on industrial real estate...