We all know how location is deemed as the king in the world of real estate, but did you know that water rights are quickly becoming the Queen? And together, they’re deciding the success or failure of multimillion-dollar deals across the U.S. With worsening droughts, aging infrastructure, and fast-changing water regulations, water is no longer just a utility, but rather a critical factor in commercial real estate deals.

Why Water Rights Matter More Than Ever-

For years, water rights were just another item on the due diligence checklist. But, today they’re shaping investment strategies-

1. Value booster: Properties with reliable water access are selling at a premium, especially in the West and Southwest where scarcity is most severe.
2. Risk factor: Without clear, transferable, or adequate water rights, projects face costly delays, lower valuations, or even total deal failure.
3. Regulatory challenge: State and local water laws vary widely; and many are changing faster than developers can adapt.

Due Diligence of Water Rights in Commercial Real Estate-

In today’s climate (figuratively and literally), checking water rights is no longer optional in a CRE deal. It’s a critical step in protecting your investment. Let’s look at what smart due diligence looks like now:

1. Identify the water rights type: Riparian, appropriative, groundwater: each has its own rules and restrictions.
2. Check transferability: Some water rights don’t automatically move to new owners.
3. Verify supply sufficiency: Will the available water meet the property’s planned use?
4. Confirm regulatory compliance: In some states, you must actively use the water to keep your rights.
5. Understand jurisdiction differences: Laws in Arizona may not apply in Texas, and vice versa.

Missing any of these steps could lead to you ending up with land you can’t develop, or even legally irrigate.

Real Examples-

1. Arizona’s Verrado Moratorium: In Buckeye, AZ, plans to expand the Verrado master community stalled when the state stopped issuing new groundwater permits. Developers are now hunting for reclaimed or surface water, driving up costs and slowing progress.
2. Texas Water Grab: Hedge fund manager Kyle Bass proposed pumping 10 billion gallons a year from East Texas’s Carrizo-Wilcox Aquifer for resale. Public backlash led to reform talks, highlighting Texas’s “rule of capture” law, which is an unpredictable factor for CRE developers.
3. Produced Water in Oil Country: In 2024, the Texas Supreme Court ruled that water from oil and gas drilling belongs to mineral rights holders, not surface owners. This impacts projects in oil regions where water reuse could be a key development component.
4. Wall Street’s Water Investments: Private equity firms are buying farmland in places like the Columbia River Basin, and surprisingly not for crops, but for the water rights. These can later be leased or sold, making water a speculative asset that can make or break CRE projects.
5. California’s Legal Grey Areas: A Central Valley farmer boosted the water table by 40 feet through aquifer recharge using floodwater. But legal disputes over ownership of that recharged water show how even eco-friendly solutions can trigger rights battles.

Why Does This Matter for CRE Investors?

1. Future-proofing the portfolio: Properties with stable water access hold their value through climate and regulatory changes.
2. Boost value with sustainability: Water-saving and recycling systems can raise property worth under ESG requirements.
3. Avoid legal chaos: Clear agreements on water use can prevent costly disputes.
4. Remember urban markets: Even cities like New York are facing higher water costs and stricter reuse rules.

The Financial Impact: Water as a Risk Premium-

Water rights aren’t just a legal issue, they also directly affect project costs, valuations, and financing in commercial real estate:

1. Case example: In Arizona, a $50M mixed-use project had to add $8M in reclaimed water infrastructure after a groundwater moratorium, cutting the project’s IRR.
2. Cap rate impact: In water-stressed markets, investors are adding a “water risk premium” of 50–100 basis points compared to properties with secure water access.
3. Lender requirements: Many lenders now require proof of long-term, reliable water supply before underwriting; especially for industrial and hospitality properties in arid regions.

Future Trends in CRE Water Strategy-

1. Water as an asset class: Expect more institutional investors to buy land specifically for its water rights, creating dedicated water portfolios.
2. On-site water technology: Greywater recycling, rainwater harvesting, and even small-scale desalination will become standard in new developments to reduce dependence on municipal systems.
3. Climate migration hotspots: Cities with strong water security, such as Pittsburgh or Minneapolis may see higher CRE demand as people relocate from water-scarce areas.
4. Tighter regulations: Western states are expected to introduce stricter groundwater pumping limits and renegotiate interstate water compacts, which could restrict development rights.

Over the next decade, water rights will be as important to CRE as zoning laws or interest rates. To secure a deal, you need to secure the water.