Is AZ going to run out of water!?

[Thomas Corley]

Where are my AZ investors at!? I want to hear your thoughts on the water shortage in AZ (Phoenix area) and what you think it means for investors?

Is it something to think about if you’re a buy and hold investor?

[Steve K.]

@Thomas Corley I remember reading about this a ton when I lived in AZ (Prescott and Tucson from 98-2003). The Hohokam people who lived in the area of what is now Phoenix from around 300-1500 AD had an elaborate system of canals and irrigation ditches from the Salt and Gila rivers. Their systems were actually too efficient at dispersing the water and ended up over-salinating the soil, causing crop failures and leading to the collapse of their civilization. Whether or not their history is repeating itself now has been a hot topic of debate ever since Phoenix was first developed. The issue certainly hasn’t gone away and doesn’t appear to be going away anytime soon. It’s definitely something to consider. The Salt and Gila River Project (basically repeating what the Hohokam did even using some of their old ditches), and the Central Arizona Project (diverts water from the Colorado River at Lake Havasu to Pima County and Tucson), have both been a disaster because of so much evaporation as the water travels across the desert, and the remaining minerals in the water making it basically useless by the time it gets to its destination. So far it seems we have not quite figured out how to avoid repeating the same fate of the Hohokam. I love Arizona personally, but perhaps there’s a natural cap on how many people should live in a place with very little water (less than 8 inches of rainfall a year on average in Phoenix). 

Phoenix is referred to as “the worlds least sustainable city” by scientists mainly because of the water issues it has. Simply piping water in from other places is problematic not only due to geography and climate (it’s a hot remote desert and water evaporates crossing a desert) but also because of water law and all the places it could be pumped in from also needing that water and it already being “spoken for”. The water conversation sometimes turns to the ideas of drawing water from the Great Lakes some 2,000 miles away, or building extremely expensive desalination plants on the Pacific Ocean, but those ideas are pretty outlandish and cost-benefit studies consistently shoot them down. Water restrictions/ limits on development seem to be more likely solutions. 

Phoenix already recycles a lot of waste water, but most of it is used for cooling the Palo Verde nuclear power plant to the west of the city, the largest in the US and the only one of it’s kind not located on a body of water. So the issues of electricity and water are coupled together. The water department itself is actually Arizona’s biggest electricity consumer, because it has to pump water uphill from the Colorado along miles of canals into Phoenix and Tucson. Most of that electricity previously came from the heavily polluting, coal-fired Navajo Generating Station which created a lot of problems for the Navajo Nation and was just destroyed a few days ago actually. I think the plan is for that electricity to be replaced by large solar arrays that are currently being built.

There’s a lot of debate on how to solve the water crisis in Phoenix, and none of the potential solutions are going to be cheap or easy. That’s where the saying “In the West, Whiskey is for drinkin’, water is for fightin’” comes from. Some historians even think the Hohokam disappeared not because they ran out of water but because they fought with each other over water. The Colorado River which feeds most of the reservoirs the water is drawn from, like Lake Mead, has seen drastically reduced flows over the past few decades, exacerbating the problem as the city grows. Whether or not a viable solution exists, I have no idea, but it definitely comes up in most conversations about the growth of Phoenix, so it’s definitely a factor to consider when investing there I’d say.

I don't think many experts debate on whether or not AZ will run out of water, it's just a matter of when, and which cities will run out first. How this will effect real estate, I have no idea but it's interesting to think about. I would guess it will lead to less development in certain areas, and an increase property values in others due to the cap on development, but I have no idea. Areas with more senior water rights will probably fare better and areas that rely on groundwater (Pinal County and many of the newer developments that don't get allocations from CAP) may fare worse, assuming current water rights remain in place and play a role. But who knows.