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The Effects of Environmental Contamination on Real Estate

The Effects of Environmental Contamination on Real Estate: A Literature Review

Thomas O. Jackson*

Abstract

The literature reviewed in this article reflects the degree to which practitioners and academics are having difficulty in arriving at consistent findings as to the effect of environmental contamination on real estate. The valuation literature in this category deals with appraisal methods, but does not develop a consensus view. The empirical sales price literature is also inconsistent, with disagreement over the existence and magnitude of price impacts, persistence of these impacts and other issues. The article concludes by summarizing the results of these studies with respect to contamination source, effect on sales price, persistence and intervening factors such as strong or weak market conditions.

Introduction

The literature on the effects of environmental contamination on real estate may be divided into two general categories. The first category involves contaminated property valuation concepts and methods. This literature is largely drawn from the appraisal profession, and addresses the notions of stigma, risk and how contamination affects the market value of real property. Most of this literature has focused on defining appropriate methods for valuing contaminated property that recognize the unique risks associated with this property type. Also, the literature in this category is primarily applicable to income-producing, commercial and industrial real estate. To date, however, the valuation literature has offered few empirical studies of contaminated real estate, but rather has focused on how existing appraisal methods can be adapted to estimate the impacts of contamination on market value.

The second literature category presents empirical studies on the effects of contamination and other negative environmental externalities on real estate prices. Studies in this category can be divided into those dealing with the effects of contamination on residential real estate and studies on commercial and industrial real estate. The residential real estate literature is research that is primarily concerned with situations in which the impacted properties are not the source of the contamination, but are affected by contamination generated from other sources and properties. This literature serves as a useful comparison to commercial and industrial property impacts, and also provides important insights into the changes in adverse effects before and after remediation or cessation of the negative externality. This generally well developed literature has evaluated impacts ranging from radioactive waste releases to the announcement of hazardous landfill sitings.

There is a more limited amount of empirical research on the effects of contamination on commercial and industrial properties. Although there have been a number of articles in The Appraisal Journal and elsewhere that discuss valuation methods for contaminated properties, relatively few published studies have been based on the empirical analyses of sales data. One reason for the lack of empirical research, especially in comparison to the residential property studies, is that contaminated commercial and industrial properties have only recently begun to sell with any frequency. As discussed in the some of the literature, in the past the risks perceived by market participants were such that equity and debt capital were generally unavailable for contaminated properties. This situation appears to be changing, and sales data is becoming more available. However, most of the literature reviewed in this category is largely based on a few case studies, rather than on the type of systematic analysis found in the residential studies.

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Table of Summary of Sale Effects including those in proximity to landfills

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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