What does the principle of externalities refer to in real estate?

The principle of externalities refers to the impacts that outside influences have on a property's value. This can include positive or negative effects that arise from surrounding factors such as the neighborhood, local economy, zoning laws, environmental conditions, or even events like the construction of a shopping center nearby. For example, if a desirable park is developed next to a residential area, property values may increase because of the enhanced lifestyle appeal. Conversely, if a factory is built next door, property values could decrease due to noise and pollution. Understanding externalities is crucial for appraisers assessing property value, as they must consider both the interactions between a property and its broader environment.