IS CRIME BAD FOR BUSINESS? CRIME AND COMMERCIAL PROPERTY VALUES IN NEW YORK CITY

JOURNAL OF REGIONAL SCIENCE, VOL. 56, NO. 3, 2016, pp. 442–470 IS CRIME BAD FOR BUSINESS? CRIME AND COMMERCIAL PROPERTY VALUES IN NEW YORK CITY * Michael C. Lens Luskin School of Public Affairs, University of California, Los Angeles, 3250 Public Affairs Building, Los Angeles, CA 90095. E-mail: mlens@ucla.edu Rachel Meltzer Milano School of International Affairs, Management and Urban Policy, The New School, 72 5th Avenue, New York, NY 10011. E-mail: meltzerr@newschool.edu ABSTRACT. To test how crime affects economic activity, we use point-specific data on crime, com- mercial property sales and assessed values from New York City, relying on an instrumental variables strategy. We find that crime reduces commercial property values, and the magnitude of the effect depends on the type and geography of crime. Elasticities range from −0.1 to −0.5. We find stronger evidence for negative violent crime effects in neighborhoods with lower incomes and higher shares of minority residents. Thus, disadvantaged neighborhoods are doubly harmed by crime—they have higher crime rates and those crimes have stronger effects on economic activity. 1. INTRODUCTION Crime and economic activities are not evenly distributed across urban areas. Neigh- borhoods besieged by crime are often areas that also lack a number of amenities, including thriving businesses. Having fewer neighborhood commercial establishments deprives res- idents of nearby employment opportunities and the ability to conveniently procure food, clothing, and other important goods and services. A lot of research analyzes the extent to which reduced economic activity affects crime in cities, metropolitan areas, and neighbor- hoods, and finds that economic decline in cities and neighborhoods leads to higher crime. However, we do not know much about whether, and how, crime affects economic activity. This paper attempts to address this gap, using commercial property values as a proxy for a neighborhood’s economic vibrancy. Using point-specific crime data and commercial property values in New York City from 2004 to 2010, we test whether crime affects the price that individuals and/or firms are willing to pay for commercial real estate. There is relatively consistent evidence that crime can influence residential prop- erty values and location choices, but does this relationship look different for commercial landowners and businesses? How does crime factor into the cost-benefit analysis for com- mercial properties? Crime can increase the cost of business and can scare off potential customers, all of which should be capitalized into the value of the commercial property. It is unclear whether this prediction plays out empirically and if so, to what extent. *We thank the UCLA Ziman Center for Real Estate for funding this project, the Furman Center for Real Estate and Urban Policy at New York University for generously providing data, and participants in the fiscal policy breakfast seminar at the Federal Reserve Bank of New York for helpful feedback. We also thank two journal editors and three anonymous reviewers for extensive comments. We also thank Pooya Ghorbani, C.J. Gabbe, and Conrad Walker for excellent research assistance, and Anne Brown for extensive editing. Received: June 2014; revised: July 2015, October 2015; accepted: October 2015. C 2016 Wiley Periodicals, Inc. DOI: 10.1111/jors.12254