The Western Drought Is A National Crisis. Will It Throw Cold Water On Some Of CRE’s Hottest Markets?

A crucial water source in the American West, the Colorado River, is drying up at a startling rate. The Biden administration has committed an unprecedented $728M to the problem, and the seven states that rely on the river’s supply have been forced to reassess how they use water, and how they’re going to keep getting it.

That includes developers seeking to build in some of the highest-growth markets in the nation as talk of water rationing and other restrictions spread. To keep building the homes these expanding regions need, developers need land with access to water, and those parcels are getting harder to find.

“You have to be pretty strategic about where you build and where you’re going to go and have a growth strategy. I don’t think those things are going to get less or any easier,” said Dan Bridleman, KB Home's senior vice president of sustainability, technology and strategic sourcing. “And I think as we're all worried about the kind of requirements for water, being very strategic and how you go forward with your land acquisition strategy is really very, very important because it will not get any easier.” 

KB Home, a master-planned community developer in the Southwest, has tried to get ahead of the curve when it comes to using and preserving water, employing water-saving technologies to cut down on usage and getting homes certified by the Environmental Protection Agency's WaterSense program. But as water gets harder to find, efforts like these will have to be either ramped up or reconfigured to account for reduced access.

The Southwest has experienced some of the strongest economic and real estate growth in the country in recent years, drawing hundreds of thousands of new residents and spurring the development of new homes at the same time that drought has worsened to the worst in a millennium.

Plans for cutting down the use of the much-diminished Colorado River have come up short, and without California’s buy-in, all of the states using its water face cuts in allocations. 

That raises the prospect that water issues could put the brakes on the region's extraordinary growth. Eight of the 15 fastest-growing cities in the U.S. are located in the region, according to data from the Census Bureau. Arizona in particular is growing quickly, increasing its population by 1.3% from 2021 to 2022, No. 5 among states in growth rate. 

One Arizona town has already learned what can happen with a tenuous source of water.

About 1,000 residents of Rio Verde Foothills, which previously bought its water from Scottsdale, were cut off from that supply in January when Scottsdale decided it needed the water for its own residents.

Scottsdale Mayor David Ortega was unapologetic about the move, saying that the residents had been warned this might happen for some years now, and railed against any move by the Arizona legislature to intervene in the matter.

“Scottsdale Water is the most sophisticated integrated water resource and delivery system in all Arizona and some legislators are attempting to hijack our facilities to benefit out-of-jurisdiction wildcat subdivisions,” Ortega said in his 2023 State of the City address in January.

A wildcat subdivision, at least in the context of water in Arizona, is one that doesn't adhere to the rules about guaranteeing access to water, because it is built in such a way or in a part of the state that makes it exempt from requirements. 

Major residential developers are certainly building as fast as they can in metro Phoenix, but finding water for those homes can hold up their progress. One of the area's largest developers, The Howard Hughes Corp., recently broke ground on Teravalis, a 37,000-acre master-planned community in the Phoenix West Valley. Plans call for 100,000 homes and 55M SF of commercial development.

So far, however, only about 7,000 houses have been approved by the Arizona Department of Water Resources. Future water supply options for the development include tapping an aquifer and or water by pipeline or possibly leasing water from a Native American tribe, The New York Times reported. The company didn't respond to Bisnow's query about the future of water for the development.

“High growth tends to be in outlying areas, because the land is cheap, and homebuilders can build homes at a price point that works for the market,” said Sarah Porter, director of the Kyl Center for Water Policy at Arizona State University. “And it so happens that those are the areas that are really challenged with respect to water right now.”

After Arizona Gov. Katie Hobbs took office in early January, she released a report that the state had previously prepared but not released, stating existing groundwater west of Phoenix can't support the development there.

Arizona law requires builders in the most developed parts of the state to obtain a Department of Water Resources certificate assuring adequate water supply for 100 years. The report projected that in western metro Phoenix, demand for groundwater will be so strong during the rest of the 21st century that there will be an unmet demand totaling about 4.4 million acre-feet. 

An acre-foot is enough to cover a football field about a foot deep, and it is roughly enough to serve the indoor and outdoor needs of two typical suburban households for one year.

“The report essentially alerted real estate developers that they can no longer meet Arizona's rigorous 100 years' water supply requirements with groundwater, and they would have to find other water supplies,” Porter said. “There are other water supplies available, and there's work underway to develop those supplies. But that water will be expensive, and there will have to be an investment in infrastructure to bring those supplies to that development.”

More expensive water and the cost of paying to finance water infrastructure could contribute to increasing housing prices, Porter said. 

Development consumes a relatively small share of available water —  agriculture uses 80% of the Colorado River supply. But state and local governments are gearing up for the region's growth and the impact it will have on water supplies.  

The Southern Nevada region's water resource plan is updated annually, taking population projections from the Nevada State Demographer and the UNLV Center for Business and Economic Research and layering on additional population growth of 10% to 15%, Southern Nevada Water Authority Public Outreach Manager Bronson Mack said.

“That gives us a conservative estimate of what we anticipate our population will be over the next half century, we then can convert that population projection into modern demands based on our water use,” Mack said.

To account for the population growth, the region is counting on conservation. Today, Southern Nevada uses 104 gallons per capita per day, but leaders have established a goal of reducing usage to 86 gallons by 2035.

“Our water resource plan demonstrates that if we achieved that goal of 86 gallons by 2035, that our community will be able to sustain itself from the Colorado River and our groundwater supplies, as well as bringing on some future water supplies through a partnership with the Metropolitan Water District of Southern California, which is building a large-scale water recycling plant in the Los Angeles area,” Mack said.

That program will give Nevada a share of that recycled water, though indirectly in the form of an exchange for a slice of California's Colorado River water.

Clark County, Nevada, home to Las Vegas, has seen its population swell from about 1.4 million in 2001 to 2.3 million in 2021.

"Yet in that time, our consumption of Colorado River water has decreased by about 33%," Mack said. "We are providing less water to more people today than we did two decades ago, and most of that is because of the development codes that have been put in place. Homes today are using about 50% less water than they did then."