Water Shortage Could Transform Markets

The massive growth in the Sunbelt seems like good news for investors, but Mother Nature may throw a wrench into developers’ plans. Water supplies throughout the desert Southwest …

The massive growth in the Sunbelt seems like good news for investors, but Mother Nature may throw a wrench into developers’ plans. Water supplies throughout the desert Southwest have been tight for decades. The recent population explosion throughout the region may cause a strain on water supplies.

Cities may limit development, which could increase demand for the available housing supply and drive prices up. Or cities may choose not to limit development, resulting in water shortages and subsequent price hikes. With  severe price hikes, residents may be forced to move, causing housing prices in metro areas to drop sharply.

Las Vegas is the archetypical desert boomtown, a sparkling city with desert stretching away in every direction. Its primary water source is Lake Mead, a reservoir above the Hoover Dam that provides 90 percent of the city’s water, according to Reuters.

With the Colorado River, which supplies water to the lake, suffering under the strain of a sustained drought, the lake now stands less than half full, according to Reuters. At the same time, Las Vegas’ population is up nearly 50 percent since 1999, according to Reuters.

Las Vegas has taken an aggressive approach to handling water shortages. In addition to earlier regulations regarding water use for landscaping, Las Vegas also recycles waste water. The waste water recycling program, spearheaded by Patricia Mulroy, head of the SNWA, increased southern Nevada’s water supply by one third, according to NPR.

“Southern Nevada is a bit different than many other communities because we are able to capture and recover virtually 100 percent of indoor water,” J.C. Davis, of the public information division at the Las Vegas Valley Water Authority, said in an e-mail interview. “Therefore, we have focused much of our effort on outdoor conservation.”

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The city limits the amount of grass on newly developed properties and has begun paying homeowners $2 per square foot to remove grass, according to NPR.

“Through [Water Smart Landscapes, a turf conversion incentive program], property owners have removed more than 92 million square feet of grass (enough to lay a roll of sod nearly halfway around the Earth), saving billions of gallons each year,” Davis said in an e-mail interview.

Local developers are also hopping on the water conservation bandwagon, embedding water efficiency by participating in the Water Smart Home program, according to Davis.

With nearly 100 percent indoor water recycling, stringent outdoor water conservation measures and incentive programs, Las Vegas may be able keep its water supply high enough to sustain development. But if the population continues to grow and the water supply continues to shrink, investors interested in Las Vegas real estate could find themselves facing a dried-up housing market. Still, with growth and profits on the rise, it is unlikely that Las Vegas will run completely dry.

“Investors should always remember that water flows toward money—it’s not different than oil or electricity,” Grady Gammage, former president of the Central Arizona Project, said in an e-mail interview. “The booming cities of the west will not ‘run dry’ no matter how complex the water situation becomes.”

Las Vegas isn’t the only city dealing with water shortages. Phoenix, Arizona, home to 20 percent of the state’s total population, is also seeing a residential influx.

“Residents in Phoenix have been told since the 1930s that growth will soon be severely limited because of the lack of water,” Robert Balling, professor at Arizona State University, wrote in an editorial for The Arizona Republic. “Millions of residents later, we continue to hear the same prediction ….[W]ithout planning, the day could come when Phoenix faces a real water crisis.”

For now, Phoenix’s water supply is in relatively good shape.

“Phoenix has a large and extremely sophisticated water supply based on two major sources of ‘surface’ or renewable water—the Salt and Verde Rivers,” Gammage said in an e-mail interview. “At current consumption levels, that supply would support a population more than twice the current population….Phoenix is in better shape with a water supply for future growth than any other major city in the arid region of the western U.S.”

Arizona is already taking action to hand over control of local water supplies. County supervisors require developers of new subdivisions to ensure an adequate water supply in keeping with a law passed Sept. 19, according to the Mohave Daily News. If the county does not pass a unanimous, non-rescindable ordinance, the responsibility for passing regulations falls to the cities and towns.

Developers within Active Management Areas, all of which lie near Arizona’s large cities, must demonstrate an “assured water supply” of 100 years’ worth of water before selling subdivision parcels, according to the Mohave Daily News. Developers outside of the Active Management Areas are required only to show an “adequate water supply,” meaning developers must inform potential buyers about water supply limitations if there is not a 100-year supply of water, according to the Arizona Department of Water Resources.

Strict development measures such as the ones within Phoenix’s Active Management Areas may significantly limit development. That may cause a spike in the area’s housing prices and rental rates, at least in the short term. Right now, Phoenix has some of the cheapest water in the west, according to Gammage, but if base rates are raised high enough, real estate in the area will drop in price.

Real estate investors would be wise to pay attention to the water policies of Las Vegas, Phoenix and other major cities in the Southwest to learn which measures work best to keep profits flowing.

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