Something is shifting in how sophisticated developers and the top capital allocators are thinking about water. Everyone in the affordable housing industry should take note as conversations move from “What should we budget for water?” to “Do we have a water strategy?”
I keep coming back to a recent article I read titled, “How Water is Reshaping Site Selection”, published in E+ELeader, where I saw for the first time in print, a discussion about water being a direct part of the capital equation. The key point of the article is that water is no longer just an operational input. It is a constraint on capital deployment. And, unlike energy, it cannot be substituted, hedged, or easily offset once a project is complete – it must be planned for.
Corporate real estate, semiconductor manufacturers, data centers and many others are absorbing this lesson – sometimes the hard way. Permit timelines in water-stressed regions have stretched to 18–36 months. State officials in Arizona have limited groundwater availability for new developments in parts of the Phoenix metro area. Industrial users in Texas are facing tighter regulatory scrutiny as aquifer levels decline. Lenders and insurers are treating long-term water access as a material consideration in underwriting decisions.
The industries responding fastest are embedding water risk into capital planning models the same way they model energy price volatility – by building scenario ranges around drought conditions and regulatory tightening before a single shovel goes in the ground.
What This Means for Affordable Housing
Let me be direct: the affordable housing industry has not yet had this conversation at scale, and that fact could become a major liability.
Our sector operates in many of the geographies facing the most acute water stress: the Southwest, Southern Plains, Southeast, and even sections of the Midwest. Affordable housing developers operate projects on thin margins, with financing structures that have limited tolerance for pre-development surprises. A 12-month delay caused by a water permit condition, or a post-closing regulatory change that raises utility costs materially, can destabilize a capital stack and jeopardize a project’s long-term financial performance. And when water rates are anticipated to rise by 5-8% annually across the US, the chances of destabilization rise as well.
The risk isn’t just for new construction. Existing affordable housing properties in water-stressed markets are carrying exposure that isn’t always immediately visible since risks can come in unexpected ways and surprising locations. One example is in western states that are threatening to restrict withdrawals during drought emergencies with only limited notice. Or in parts of Georgia and the Carolinas, where demand has quietly outpaced recharge rates; not because of drought, but because population growth has outrun the supply assumptions those markets were built on.
For developers, syndicators, and lenders, there are three key areas where clear understanding of water issues and strategic planning needs to happen:
Water Sourcing. Water availability needs to be evaluated early in pre-development, alongside the site feasibility study. Sites that look viable due to incentives or historical utility models may carry new permitting timelines or long-term utility cost trajectories that change the calculus.
Underwriting and operating assumptions. Operating budgets that don’t account for realistic increased water pricing, potential surcharges, or the cost of utility volatility in water-stressed markets are increasingly understating real exposure. Lenders and syndicators should be asking detailed questions about water strategy and management as part of standard underwriting.
Asset management for existing properties. Portfolios in water-stressed geographies or where outdated infrastructure is causing significant water rate increases should be reviewed for comprehensive water management. Properties that don’t have visibility into unit level water use or strategies to control that water use will find themselves unable to control run away costs and will experience decreased NOI as a result.
This Is a Risk Decision, Not a Sustainability Initiative
Framing matters. Water risk is not an ESG checkbox or a values statement. It is a financial and operational risk that is already affecting project viability, timeline predictability, and long-term asset performance in markets across the US.
The article I referenced puts it plainly: “Water availability isn’t becoming a constraint. It already is. The only question is whether your capital planning reflects that before or after it costs you.”
At ION, we’re actively working to ensure our affordable housing partners have clear visibility into unit level water use, intelligence and insights into where water use and loss are highest, and the communication and assistance they need to stop those water leaks fast. We believe that developers, syndicators, and lenders should build water risk into their planning by asking the right questions now. These include: How much water should a property use on a per bedroom basis? Where does water loss happen and why? How can water loss be identified and minimized as quickly as possible? How can I control water use and cost throughout my property to best manage NOI? How can I best be positioned to handle current and coming water challenges?
Understanding that water needs a well thought out, long-term strategy is deepening across industries and organizations. Will you join the sophisticated developers and top capital allocators who lead the affordable housing market in this new direction?
