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Effect of Seismic Risk on Lifetime Property Value

Porter, Keith A. and Beck, James L. and Shaikhutdinov, Rustem V. and Au, Siu Kui and Mizukoshi, Kaoru and Miyamura, Masamitsu and Ishida, Hiroshi and Moroi, Takafumi and Tsukada, Yasu and Masuda, Manabu (2004) Effect of Seismic Risk on Lifetime Property Value. Earthquake Spectra, 20 (4). pp. 1211-1237. ISSN 8755-2930. doi:10.1193/1.1810536.

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We examine seismic risk from the commercial real estate investor's viewpoint. We present a methodology to estimate the uncertain net asset value (NAV) of an investment opportunity considering market risk and seismic risk. For seismic risk, we employ a performance-based earthquake engineering methodology called assembly-based vulnerability (ABV). For market risk, we use evidence of volatility of return on investment in the United States. We find that uncertainty in NAV can be significant compared with investors' risk tolerance, making it appropriate to adopt a decision-analysis approach to the investment decision, in which one optimizes certainty equivalent, CE, as opposed to NAV. Uncertainty in market value appears greatly to exceed uncertainty in earthquake repair costs. Consequently, CE is sensitive to the mean value of earthquake repair costs but not to its variance. Thus, to a real estate investor, seismic risk matters only in the mean, at least for the demonstration buildings examined here.

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Additional Information:©2004 Earthquake Engineering Research Institute (Received 22 September 2003; accepted 15 March 2004) This research was funded by the CUREE-Kajima Joint Research Program, Phase IV, whose support is gratefully acknowledged. Thanks also to Mr. John Machin of Ray Young Associates, who provided professional cost-estimation services. A number of investors and decision makers contributed their time during our exploration of risk attitude. For anonymity’s sake, we cannot thank them by name, but their help is appreciated.
Subject Keywords:risk analysis; investment; earthquakes; property market; econophysics; Seismic vulnerability; Seismic risk; Decision making; Loss estimation; Real estate investment
Issue or Number:4
Record Number:CaltechAUTHORS:PORes04b
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:8756
Deposited By: Archive Administrator
Deposited On:13 Sep 2007
Last Modified:08 Nov 2021 20:52

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