One Attempt at Incorporating Local Crime Into an Office Valuation

Crime often comes up as a decision factor in residential real estate, but it is just as valid a concern for commercial properties. San Francisco has become a center of controversy and coverage of its crime rate. Now, statistics from the city’s police department suggest that most crime types, including violent, have been fairly level since before 2010, with larceny and theft being what had surged into 2017, dropped some by 2020, went up again in 2022, and is coming back to levels reminiscent of the early 2010s.

But even assuming the numbers are accurate, it almost doesn’t matter. Perception is key to human reaction, and people perceive the city as being highly unsafe. That perception can easily turn into reluctance to take an apartment — or office, retail, hotel, multifamily, and other commercial space. Some major store closings in San Francisco have included Office Depot, and Anthropologie since 2020. Nordstrum left in May, citing slowing foot traffic and the “dynamics of the downtown San Francisco market.”

Trepp recently worked on developing a way of measuring valuation impact of crime on CRE properties with San Francisco as the case study, but an obvious pertinence to any city that finds itself, if not in national headlines over crime rates, at least local ones.

The analysis took a layered approach using geographic distributional analysis of violent crime — homicide, rape, robbery, and assault — and property crime — burglary, larceny theft, motor vehicle theft, and arson.

Next step, they put a distribution of property news stories on top along with property type and relative value of loans on specific properties. The news stories have some limitations because there’s no way to ensure that all incidents and actions you might want to capture are reported. But it is a start.

Third, they added a “spatial correlation between business vitality and crime.” This isn’t necessarily causal, but it also seems reasonable that criminal activity could have an effect on surrounding businesses. They used registered business data and looked whether declining crime rates in some areas of the city had correlated business growth. They couldn’t find a definite causal relationship and, in some cases, a decline in crime could mean reduced economic activity. (Perhaps because ongoing worry and assumptions of higher crime might keep more people out of the area.)

The final lawyer was looking for underperforming loans in areas of higher crime. They were able to “identify properties that might be at risk of default by overlaying loan performance data onto these crime-affected business locations.”

“The reasons driving empty offices and tenant departures are multifaceted and are made even more complex in the current economic and work environment,” they wrote. “Therefore, rather than attempting to find a causal explanation for how crime influences the CRE market in San Francisco, the primary objective of this research report has been to arm market participants with data-driven insights, empowering them to navigate the dynamic property risks associated with crimes in this ever-evolving city. The methodology used in this study can be applied to other cities, and comparison studies can be further conducted to help assess risks across submarkets.”