"Water, water everywhere…" except in the Western United States, that is. For the last two decades, water has been increasingly difficult to come by, even as the population of states like California, Arizona, Nevada, and Colorado continue to grow explosively. Add in a little (or a lot) of climate change-related heat, and you’ve got a big problem on your hands, for sure, especially if you own real estate in an area where drought is severe.
The whole dam situation
Back in mid August, the federal government officially declared a water shortage at Lake Mead, which is one of the Colorado River’s main reservoirs. The Colorado River serves approximately 40 million people throughout the West, where in California alone, 41 counties are under a state of emergency due to drought conditions.
As of September 23, 2021, The National Integrated Drought Information System (NIDIS) shows that 46.56% of the lower 48 states are facing some sort of drought, an increase of 2.1% from last week. In the lower 48, 74.9 million people are currently affected.
Rivers and reservoirs are facing low water levels below records set decades ago. Lake Mead, for example, is forecasted to reach a level of 1,066 feet above sea level by the end of this year, representing just 34% of its capacity. It hasn’t been that empty since it was first being filled in the 1930s.
The NIDIS currently projects continued severe drought conditions over the long term in parts of every Western state, with the most affected areas in California, Oregon, Washington, Idaho, and Colorado. This is a situation forecasted to only get worse over time, given the current conditions and remedies available.
Western real estate trends today
Although it’s well-documented that people continue to flock to even the drought-prone areas of the West, it’s not an entirely clean-cut situation. Sure, residential housing sales in California, for example, continue to climb into the stratosphere, reaching an all-time high average price in August of $827,940, up 17.1% year over year, but agribusiness is suffering.
In 2019, California farmers planted 2.983 million acres of crops, but that number has steadily declined. In 2021, they only planted 2.550 million acres, a 433,000 acre decline (or about 14.5 %). A lot of this is related to a reduction in water availability, since farmers have been bearing the brunt of the drought so far. Part of it may also be due to an increase in land values. California farm land averaged $8,970 per acre in 2017, but $10,900 per acre in 2021 -- a 17.7% gain in value for real business assets in what is increasingly becoming a frustrating and uncertain industry.
Those farms located in drought-stricken agricultural areas, in turn, are being bought up for housing, which, in the short-term, anyway, should reduce some of the stress on the water supply.
The Millionacres bottom line
For commercial types of real estate, the boom in people headed West is likely to bring a boom in business, as populations simply need more jobs, more stuff, and more places to put stuff. Everything from port traffic and warehousing to data centers and office demand are surging.
Right now, the West is booming, as the West has been historically known to do. People want to be out there; it’s a wish fulfilled for whole different kind of life for people who have never crossed the Rockies. So they go, they settle into California, Oregon, Washington, Colorado, and so on, and they take in all the opportunities before them. And don’t get me wrong, there are a lot.
There are lots of ways to get ahead in the West; there have been since that first bit of shiny gold was found near Sutter’s Mill. But there are just as many ways to lose everything, as a lot of those same early gold-chasing hopefuls discovered and so many after them have, too.
Today may be a healthy time to get into (or stay in) Western real estate, but the future is a lot less certain. Converting farmland into additional residential property may slow the need for water, but at a considerable longer-term cost: namely, a lack of enough farmland to feed all these people. It’s not like prime farmland exists everywhere. Then again, if drought conditions remain anything like they’ve been and are predicted to be, it may not matter. The old dry and dusty land won’t grow food anyway.
Although drought conditions don’t seem to be affecting real estate prices across much of the Western United States right now, a lack of water and forced conservation will eventually catch up with owners and investors. It’s one thing to not be allowed a permit for a fancy fountain out front of a new apartment building and yet another to not be able to get a permit to build it in the first place due to a strict limit on the number of connections to the water supply a municipality is allowing (a situation already occurring in some areas).
Sure, scarcity can drive prices up, but only so far. And a dwindling supply of a resource that’s not easily renewable (like water) is going to start looking pretty unattractive to even the most adventurous tenant. There’s a tipping point in there unless something changes very quickly in the bigger picture.
If you intend to invest in drought-stricken areas, carefully and deeply consider the long-term climate conditions. Climate change isn’t making it easy on anybody, but many areas in the West may struggle to maintain the population density they’ve carried throughout the 20th and early 21st centuries simply due to the very real and very dramatic effects of climate change.