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Gauging Earthquake Risk

Spurred by catastrophes in Haiti and Chile, U.S. property owners contact seismic experts.

The earthquakes that struck Haiti and Chile in recent months — toppling offices, apartments, hospitals and homes, and killing more than 230,000 people — have heightened interest in seismic risk among property owners and investors in the United States.

A recent report for the U.S. Geological Survey (USGS) calculates the potential financial damage of a magnitude-7.8 quake along the southern San Andreas Fault in California at $212 billion.

“That's partly property damage from earthquake shaking. A little over half is because of fire following earthquake,” says Keith Porter, associate research professor at the University of Colorado in Boulder. Porter was one of several authors of “The ShakeOut Scenario” report. Property owners and investors, including real estate investment trusts, have contacted experts like Porter to assess their vulnerability to quake damage.

Each year, 5,000 earthquakes strike the U.S., occurring in 39 states over the past century, according to the New York-based Insurance Information Institute. The chance of a 6.7-magnitude quake striking Southern California is 97%, and Northern California, 93%, according to USGS and other researchers.

Porter applies catastrophe models, called “cat models,” to assess seismic risk. A grocery chain with properties near the San Andreas Fault commissioned a report. “They knew they had risk,” says Porter. The chain faced a choice of whether to spend millions of dollars to make its properties more quake resistant, or whether to buy catastrophic insurance coverage and transfer the financial risk.

Besides California, U.S. locations with significant earthquake risks include Western Washington State, Southern Alaska, Missouri and Utah.

Lenders in quake zones typically demand reports, called probable maximum loss studies, to determine the potential extent of damage before issuing mortgages of $10 million or more, says Porter. For example, a potential buyer for a $20 million apartment complex in Loma Prieta, Calif., where a deadly quake struck in 1989, might provide an engineering report showing that a magnitude-6.5 quake would cause $10 million in damage.

In that scenario, the lender might deny a loan because the damage could amount to half of the complex's value. Lenders fear that after a big quake, borrowers could walk away from the mortgage, leaving the bank stuck with a damaged building and high repair costs.

The magnitude-7 earthquake that struck Haiti on Jan. 12 caused an estimated $13 billion in damage. The magnitude-8.8 quake and tsunami that struck Chile Feb. 27, one of the largest in half a century, killed at least 340 people and caused some $8 billion in damage.

Many Californians remember the 1994 quake in Northridge that killed 72 people and caused $20 billion in damage. Millions of Californians are expected to participate in a “ShakeOut” drill Oct. 21 to practice responding to a real crisis.

A quake that struck the New Madrid Fault in Missouri in December 1811 was so powerful that eyewitnesses reported that the Mississippi River ran backward.

That quake and one that hit Missouri in 1812 were felt hundreds of miles from the epicenter, says Porter. “Those earthquakes rang church bells in Boston and woke the president in the White House.”

In Progress: Medical Office Building

DEVELOPER: Frauenshuh HealthCare Real Estate Solutions

LOCATION: Murrieta, Calif.

SIZE: The five-story, 160,000 sq. ft. of office building will accommodate about 60 physician offices.

BUZZ: The approximately $20 million medical office building to be built on the campus of Loma Linda University Medical Center - Murrieta, a $211 million, 106-bed hospital, expected to open in 2011.


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