Effect of Seismic Risk on Lifetime Property Value
Journal Article
Overview
abstract
; 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.;
