(June 19, 2023) Here is the highly criticized Moody's report that had everyone talking over the weekend. I thought my readers would like to see the original analytics to know what others are talking about.
AN ANALYSIS BY NATALIE AMBROSIO PREUDHOMME (Published June 6, 2023)
Last week Arizona placed limits on housing development around Phoenix due to a groundwater shortage. While approved projects will be allowed to go forward a new groundwater study by Arizona determined there’s not enough groundwater for all of these already approved developments. This means they’ll be relying on conservation and alternative sources and will be reducing new development.
New homes relying on wells will no longer receive permits in some parts of Maricopa County. While growth will continue in the near-term in big cities like Phoenix, Scottsdale and Mesa because they get their development plans approved every 10-15 years, in the longer term, the cities won’t get approved for new homes relying on groundwater.
However, developments outside of these pre-approved areas in the cities need to prove that they have a 100-year supply of water before they can get approval. This is challenging, especially as water in the Colorado River continues to dwindle and negotiations often alter states’ shares to the remaining water. Having to seek alternative water sources beyond groundwater adds to the expense of a home, with implications for housing affordability.
Moody's physical climate risk data estimates that by the 2030-2040 timeframe, 100% of Maricopa County’s projected population will have a high or red flag (highest) exposure to water stress. Figure 1 shows that while the most densely populated area in Arizona faces the greatest water stress, most of the state is highly exposed.
While the US southwest faces particularly high exposure to water stress, other parts of the country are also exposed. As we noted in April, the five fasted growing metros over the past five years all have high or medium exposure to water stress. Figure 2 shows the counties in the US in the highest water stress threshold in 2030-2040, with many other counties having high water stress.
While drought is sometimes thought of as a vague long-term risk, Arizona’s recent announcements demonstrate that drought will have tangible impacts on real estate markets. Near-term development will continue with a pipeline of approved projects underway. Still, in the longer term, a growing understanding of the reality of water in Arizona will increase the costs of building and will slow the sprawl which has enveloped the Phoenix area in recent years.
And while they may continue to get development permits, commercial facilities can be even more at risk to insidious impacts from drought than residential buildings because, in many cases, they use larger amounts of water and electricity. From data centers that rely on water for cooling to industrial facilities which often use water in their processes, these properties may face substantial increases in operating costs due to water scarcity in the coming decades.
They may also face reputation risk. For example, PepsiCo and Coca Cola were the subjects of protests at bottling facilities in highly water stressed parts of India and many plants there eventually shut down. Likewise, water use restrictions at recreational properties like hotels and golf courses present challenges, as clientele expect amenities that are often water-intensive.
Cities, developers and companies will have to get increasingly creative with how they manage scarce water resources as rising temperatures increase evaporation from surface water, snowfall declines and growing populations continue to stress groundwater. For example, in Arizona’s rapidly growing Queen Creek, residents fish at a lake fed by recycled wastewater, while the utility director searches for the additional 9.8 billion gallons of water per year that the town needs to maintain its growing population.