Why Water Restrictions won’t Slow Commercial Developments on the Edges of Metro Phoenix

Article originally posted on AZ Central on June 30, 2023

On the outskirts of metro Phoenix, some new housing developments won’t get approved due to a lack of water, but in those same fast-growing areas, commercial development is moving forward unhindered.

That’s because the new restrictions apply only to new housing developments that rely solely on groundwater, and not to commercial development like industrial buildings or shopping centers. But that does not mean commercial builders aren’t taking notice, said Suzanne Kinney, president and CEO of the Arizona chapter of NAIOP, an advocacy group for the commercial real estate industry.

“There is industrial and mixed-use development that needs adequate housing,” she said. “This is not one type of development pitted against another, we are all connected.”

Outer suburbs have land, access to transportation

Kinney said the outskirts of the Valley, including cities like Buckeye, Queen Creek and into Pinal County, have become popular for large-scale industrial development because there are larger parcels available for buildings that demand bigger footprints. For those located in the far West Valley, closer proximity to California and the ports there makes it an ideal location for distribution and logistics facilities.

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“There are developers looking to move into the urban core, but sites with size in the urban core are harder to find,” she said. “It’s an issue of land availability. We are fortunate from an economic development standpoint that we are attracting companies with large space requirements, and a lot of those facilities need quick access to highways and railroads.”

Kinney said many local companies that are members of NAIOP told her they were getting worried calls from their investors about Arizona’s perceived lack of water. However, she said she has not heard of anyone backing out of a deal because of water. Those investors and developers talked with local experts, like economic development professionals, about what the move actually means and where is affected, calming their fears.

The change does not affect cities like Phoenix that have a diverse, renewable water supply and does not affect projects that have already been approved.

“It is a call to continue to be very mindful with our water use, but it is not a crisis,” Kinney said.

Developing on former farmland decreases water use

Tony Lydon, executive managing director at real estate firm JLL, who specializes in industrial real estate, said even large-scale industrial buildings are relatively low water users, and when they are built on former farmland, they use far less water than agricultural use.

Statewide, about 5% to 6% of water goes toward industrial uses, said Chris Camacho, president and CEO of the Greater Phoenix Economic Council.

Warehouses and distribution centers, which make up about 65% of the industrial buildings in the Phoenix market, usually only use water in bathrooms, fire sprinklers and landscaping.

Manufacturing is the next-biggest user of industrial space, Lydon said. Those buildings generally are heavy power users, but not as big of water users, with the exception of the White Claw and Red Bull canning facilities in Glendale, which manufacture drinks.

Data centers, which traditionally were large users of water, have also evolved to use less, Lydon said.

Over the past two or three years, data centers have moved toward closed-loop water systems that reuse water, and toward cooling with other methods, Lydon said.

When Facebook parent company Meta announced its southeast Mesa data center near Elliot and Ellsworth roads in 2021, the company pledged to make it one of the most water-efficient data centers in the world. At the time, the project was estimated to use about 1,400 acre-feet of water per year, the equivalent of about 4,900 single-family homes. That project has since expanded its footprint and scope, but Meta said it invested in water projects to restore more water into the Colorado River and Salt River basins than it used at the center.

Development and demand continue to be strong

Lydon said speculative development, meaning starting construction on a building before having a signed lease from a business, is still happening, even in some of the farther reaches of the Valley that are fast-growing areas. Companies have continued to lease large buildings, keeping demand high, even in fringe areas.

“We are pre-leasing in Pinal County, and that’s never happened before,” Lydon said, adding that he also has a lease out for signature with a Fortune 25 company leasing a speculative space in Buckeye.

Pumping the brakes on housing development without assured water is a proactive measure, he said, not a reason for panic.

“It is prudent management of our water portfolio to call a timeout on some of these more fringe areas without a water solution,” Lydon said. “Phoenix is perceived as a market with no barriers, and that’s not a good thing.”

Companies that have chosen to locate in Phoenix and the Valley appreciate the 100-year water certificate program, Lydon said.

Commercial projects, like shopping centers, follow houses

Other commercial developments, like shopping centers, also are moving forward in the farther suburbs. Phoenix-based Vestar, the owner and developer of outdoor shopping centers, including Tempe Marketplace and Desert Ridge Marketplace, has projects underway in both Queen Creek and Buckeye, where housing growth has brought a need for stores and services.

“Most demand for shopping centers is on the fringes,” David Larcher, Vestar’s president and CEO, said.

Water use in shopping centers is usually limited to bathrooms, but restaurants do use more.

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However, Larcher said Vestar is “certainly cognizant of areas that have assured water supply” when choosing where to build.

Landscaping can also use more water at shopping centers, and Larcher said Vestar has developed a proprietary program for conservation, which includes using drought tolerant plants, rainwater harvesting, placing artificial turf in some places instead of lawns and other environmentally friendly initiatives like adding solar panels and testing “cool asphalt” to lower the ambient temperature of parking lots.

“Our goal is to make the Verrado Marketplace the most sustainable shopping center in the country,” Larcher said.

Verrado Marketplace is expected to begin construction in Buckeye in the second quarter of 2024. It will include about 500,000 square feet of new retail and restaurant space.