[REN #940] Due Diligence: The Risk of a Future Water Shortage

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Due Diligence: The Risk of a Future Water Shortage, Real Estate News for Investors Podcast Episode #940 Header

If you are a real estate investor, you’ve probably thought about climate change and how it may impact your portfolio. We’ve been warned about rising sea levels, storm surges, more severe hurricanes, and more destructive wildfires, but one future risk that hasn’t gotten as much attention is the risk of a water shortage in areas that don’t get much rain or snow.

According to a new risk assessment study by the Blackrock Investment Institute, it’s a financial risk that many investors may not be factoring into their portfolios. (1)

The global pandemic has highlighted the importance of a resilient job market in the midst of a health crisis. Las Vegas is an example of a job market that has not held up well during the pandemic because it relies on tourism. When the national economy shut down, tourism stopped short, and so did a lot of those jobs. The nation was blind-sided by the pandemic, and the impact on areas like Las Vegas. We’re getting more of a warning about climate change.

An Understated Risk

Although we’ve heard plenty about floods and fires, the availability of water could also become a problem. The Blackrock report called it an “understated risk.” It says that worldwide, one in four people live in areas right now where there’s a high risk of water scarcity. That has financial implications for cities, businesses, individuals, and investors.

As demand outstrips supply, the cost of water will increase for several reasons including competition for tight supplies, new regulations for efficiency and conservation, and potential disruptions for businesses with heavy water needs. Water stress may also include impacts to water quality because of pollution, and that will also have a price tag.

The risk is not evenly distributed around the world. The report shows a map with much of the western U.S. at extreme risk of “water stress” by the year 2030 — that includes California, Arizona, New Mexico, and Utah. In the central and southern regions, the risk is much lower, but the water stress levels vary across all areas.

Water Stress to Double in Ten Years

Blackrock used global real estate investment trusts or REITS to show how the impact will vary from region to region. The study included geolocation data for 84,000 REIT properties, and how they connected to 590 publicly owned companies. The results show that almost two-thirds of U.S. REIT properties will experience water stress by 2030 because of urbanization and climate change. That’s more than double the percentage today.

The report says, REIT companies that are more resilient to water stress will be worth more in the future, when sustainability becomes a more important commodity. The analysis can also be applied to other asset classes and industries.

It points out that “our understanding of the connection between climate risk and financial risk is evolving” so we still have a lot to learn. And there may be breakthrough strategies to help offset any shortages. That might include more efficient water use and better methods for irrigation and wastewater treatment.

But, it says, water stress is a “key component of climate risks” that will likely grow over time with financial implications. The report suggests, “The time to integrate them into the investment process is right now.”

The issue of water scarcity isn’t new. Long-standing water wars in California are just one example. But what this report says is that climate change will make the water situation worse in some areas, and it’s something investors should remember when they are considering future risks. In addition to the financial impact of water scarcity, tenants may also be sensitive to landlords and metros that address the issue responsibly.

This may be why so many of our members at RealWealth choose to invest in Ohio. There’s plenty of water there, along with Florida, Alabama and Georgia. And, these areas are also experiencing some of the strongest demographic growth in the country due to low state income taxes, affordable lifestyles and warm weather.

You can find out more about these metro areas, along with available investment properties with property management in place, on our Best Markets page.

You can also read more about the “water stress” issue in the Blackrock reports below.

Links:

(1) Blackrock Report

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