Research has shown that property next to oil and gas development comes at a discount. Just how much of a discount, though, is a little shocking. The other mystery is who will actually be impacted. As both housing and oil and gas development expand throughout Colorado’s front range what does this mean for your real estate and property values?
Oil and Gas black hole
There has been little actual analysis of the true impact of an oil or gas well on a property in Colorado, but there has been other research on the East Coast that is basically useless for Colorado. Colorado is a bit different than other states like Pennsylvania that have oil and gas development as much of the development in Colorado is near the front range or east that have flatter open views as opposed heavy tree cover therefore the impact on Colorado will be greater than other areas as many people think “out of site, out of mind”. So how do we see what the impact on property values is due to close proximity oil/gas development?
What other “industrial activity” is comparable to oil/gas development?
I think the closest thing to oil and gas development in Colorado would be high voltage powerlines. Powerlines are very similar to oil and gas where many people do not want to locate a house/commercial property next to them for various reasons. There is substantial data on how powerlines impact value as they have been around for a while.
What is the impact of a large powerline on a property?
Lots located next to power lines tend to sell for a whopping 45 percent less than similar lots further away from high-voltage transmission lines, according to a new study in the Journal of Real Estate Research. Lots that are non-adjacent to power lines but are located within 1,000 feet of them often sell at a discount of 18 percent, researchers Chris Mothorpe and David Wyman, the authors of the study, found.
Mothorpe says health concerns about being near high-voltage lines are one of the factors likely driving down prices of nearby land. But a solid link between power lines and health issues remains elusive, he adds. Unattractive views of power lines also affects land prices, Mothorpe says, and residents who live near them may hear a humming sound produced by the lines. “My intuition tells me the visual [component] is the largest” factor leading to a decrease in values, Mothorpe told The Wall Street Journal.
Value decline from oil/gas
Although each situation will be unique with oil/gas development, powerlines can provide a roadmap for the possible declines in property value. I was surprised at the discount the market demands to be located next to high tension wires, but suspect the same to be true with oil/gas development. Regardless of your stance on oil/gas development most rational people would not opt to locate a house in close proximity. This leads to a substantial discount on these properties. As we can see from studies on powerlines, the properties will sell at a substantial discount of around 45%.
How to avoid taking a value hit?
Nobody wants to take a loss on real estate, so the best way to prevent a loss is the obvious solution which is to avoid properties that are in close proximity to oil/gas development. This leads us to the mystery in Colorado; you might not know your property will be impacted by oil/gas development until many years down the road as mineral rights and surface rights have been split meaning although you own the land your property sits on someone else owns the minerals below the surface.
This “mystery” is creating much of the conflict between housing and the oil/gas industry with numerous ballot proposals trying to address the issue by increasing setbacks, reducing drilling, etc… I’m not sure there is a good solution for either party, but regardless, you want to try to avoid being “invited to the party” and taking a 20-45% hit on your real estate value.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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