Arizona homebuilders are using a rental loophole to get around water laws
Desert cities around Phoenix are constantly facing questions of water supply — not just at water management agencies but also at city councils considering where to develop. That's because Arizona has one of the most powerful laws in the country linking water with the decision to build.
In Casa Grande, Mayor Craig McFarland knows his city's future is linked to water. Housing is already in high demand. Industry is moving into the area, with both a battery and an electric car manufacturer offering thousands of jobs near town.
"We have this huge need for workforce housing, and that workforce housing needs a place to go," McFarland says. "And so that's why all of a sudden the rush is on."
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But whether that housing can be built is a question. A two-decade drought in the Southwest has triggered cutbacks to Arizona's water supply, as climate change strains the Colorado River, one of the state's biggest water sources. Underground aquifers are the state's other major water source. But in Pinal County, where Casa Grande is located, overpumping of aquifers is a big concern.
So when it comes to development, McFarland consults a map that looks like a patchwork quilt. Some parcels of land are blue, which means a water supply would be ensured for new homes. But many other parcels are white. There, developers would have to find their own water supply in order to build. State law limits growth where water is in short supply, requiring new subdivisions to show they have 100 years of water for their customers.
"Arizona is the only state in the country that requires 100 years' worth of water," McFarland says. "It's a consumer protection."
This year, regulators announced they would not be guaranteeing water supplies for new subdivisions around Phoenix, limiting future construction. That has been the situation for several years in Casa Grande.
Still, McFarland isn't discouraged. In the long term, the city is looking at water recycling and conservation. And in the short term, building hasn't stopped.
That's because developers have found a profitable workaround. Arizona's water law applies only when lots are subdivided into smaller lots for six or more homes and those houses are either sold or made available for long-term rentals. Instead, developers have turned to building short-term rentals on a single large piece of land.
Not far from the center of town, construction workers are putting the finishing touches on new single-story homes in a 331-unit development. Water supply hasn't been a barrier to building because these units will be part of one large rental project.
"We don't need an assured water supply because it's one lot," says Greg Hancock of Hancock Builders, which is constructing the project. "Although it's 331 units, it's one lot."
Casa Grande, like several other Arizona cities, has seen a boom in these "build to rent" projects. Hancock says after decades in the business, his company started building them only recently and has more than 10,000 units built or in development.
"It's been one of the greatest housing markets forever," he says. "People will not stop moving here."
But with the growth, that unaccounted-for water demand is raising red flags. Already, Arizona water regulators say there won't be enough groundwater to meet existing needs over the next 100 years.
"If you build houses and you rent them, there's no way to go back and undo the fact that they're there and people are living in them," says Kathleen Ferris, senior research fellow at the Kyl Center for Water Policy at Arizona State University.
Ferris helped write Arizona's 100-year water law four decades ago. She says its strength is that it tethers building decisions to water decisions. Back then, build-to-rent wasn't common. Now, she says, the state is reaching a pivotal moment when all water use needs to be accounted for.
"Climate change and aridification have come on so much faster than most people thought," she says. "Yes, there is still opportunity for growth, but there needs to be an understanding of the limits."
This year, Arizona legislators drafted two state bills to close the loophole, which would require rental projects to have a water supply. Both failed to pass. Some cities pushed back, saying it would limit a key way to address the housing shortage. Now, a working group convened by Gov. Katie Hobbs is examining the issue.
Still, the overriding conversation is about growth. With droughts expected to worsen, Arizona's water law is pushing cities to look at boosting their water supplies locally, whether that's through building water-recycling projects or amping up conservation.
"I used to say, 'Maybe we're at our limit. Maybe we can't build any more houses,'" says Pinal County Supervisor Stephen Miller, who works on water issues. "So now I say, 'If we're going to maintain any type of growth, we have to bring water in.'"
