A friend told me a story recently that sounds, at first, like a joke you’d hear at a bar full of real estate bros. A developer sells a site to a major fast food chain — the kind you would definitely know, the kind with real estate teams that have checklists for their checklists. National tenant, strong credit, repeatable playbook. This is not a group that tends to get surprised by development risk.
The site was zoned correctly. The deal penciled. Everyone involved felt, in the way that people in real estate like to feel, that this was an easy deal.
Then the fast food chain went to pull permits, and the city said no.
Not because of zoning. Not because of traffic. Not because of an endangered salamander or a historical overlay or anything else you might expect in Austin or elsewhere.
Because the site couldn’t get water.
The buyer sued, the guy who did the deal lost his job, and we all woke up to the stark reality of what “assume” means in regards to water. Somewhere between due diligence and closing, the poor bloke selling the site had made a very simple assumption: that if you are allowed to build something, you will also be allowed to serve it with fresh agua. That assumption used to be mostly true. These days in Austin — or any fast-growing areas around the world as Lauren talked about with LA and Israel — not so much.
The Missing Variable in CRE Underwriting
We tend to think of development as a fairly linear process. First, you solve zoning: can you build the thing you want to build? Then you solve capital: can you finance it? Then you solve execution: can you actually get it out of the ground? If those three line up, the deal happens. If one breaks, the deal dies. This is the mental model that underpins a lot of underwriting, a lot of land pricing, and frankly a lot of confidence.
The problem is that this model is missing a variable: water availability.
Austin is a useful place to see this clearly because the city has, in many ways, done everything “right.” Through Austin Water’s Water Forward plan, Austin has explicitly framed water as a long-term, managed system. It plans on a 100-year horizon. It emphasizes conservation, reuse, drought resilience, and diversified supply. It is, by most standards, ahead of the curve.
What it does not do — because it cannot — is guarantee that every developable site will have access to water.
So how much of a water strain is Austin currently experiencing?
The city holds rights to roughly 292,703 acre-feet per year from the Colorado River system — on the order of 95 billion gallons annually. The average person uses about 50K gallons per year. That equates to serving 1.9M people annually compared to Austin’s current 1M residents. That 1.9M number is large enough to feel reassuring, and in aggregate it is. But water systems do not operate in aggregate. They operate through physical infrastructure: treatment plants, transmission mains, pressure zones, storage, redundancy systems that were designed for a certain version of a city.
Of the 292,703 acre-feet per year available, Austin only used 38% of capacity for City of Austin municipal water rights. However, a total of 93% was used across all community water needs in 2024. Think industrial, environmental, agricultural, and other uses. Municipal water rights may be the most critical, but what happens when the businesses and services we rely on here start to run out of water?
The gap between what is theoretically allowed and what is practically feasible is where stories like the fast food deal live.
On paper, nothing was wrong. In practice, the system could not support the use. The difference between those two things is increasingly where risk sits.
For a long time, Austin managed to push this problem outward through efficiency. Per capita water use has fallen materially — on the order of 35–40% since the early 2000s. The city used roughly the same total amount of water in 2023 as it did in 2011 (check out the chart in the clip below), despite significant population growth. This is a laudable success.
But efficiency is a one-time lever and a diminishing one. You can get people and real estate owners to water their lawns less, install better fixtures, reuse some portion of what they consume. You cannot reduce per capita usage indefinitely while continuing to add absolute demand. At some point, the constraint shifts from “how efficiently are we using water” to “how much system can we build and where.”
And that is a harder problem.
What is interesting about all of this is not just that water is becoming a constraint. It is that it is becoming a constraint in a way that is not fully priced into how people think about real estate. Especially new development and major redevelopments.
Take a straightforward redevelopment in Austin. You buy a property that currently supports, say, 150 units, and you plan to redevelop it into 400. Zoning probably allows this. In a traditional model, that would be the primary gating item. But when you go to actually connect to water, the city does not say, “There was water here before, so there will be water now.” Austin Water recalculates demand based on your proposed use. It evaluates system capacity. It looks at whether the existing infrastructure can handle the incremental load.
And if it cannot, the solution is not that the city upgrades the system for you on demand. The solution that the City of Austin Development Services Department will throw out is that you, the developer, either fund the necessary improvements, accept delays while capacity is studied and expanded, or redesign the project to fit within existing constraints.
For larger projects, this becomes even more explicit. Austin’s code per Chapter 25-9 requires onsite water reuse systems for developments above 250,000 square feet. That means capturing and reusing greywater, integrating with reclaimed purple pipe systems, and generally reducing net demand on potable supply. Watch the below clip to see the joke we made about the 250,000 square foot minimum!
This is framed as sustainability policy, and it is. But it is more a condition of scaling. If you want to build big in a fast-growing city, you have to solve your own water problem.
So you end up in this slightly paradoxical place. Yes, the city has water. The long-term plans are thoughtful. The aggregate numbers are stable. And yet, at the level that determines whether a specific deal works, the answer to “can I get water here” is increasingly conditional.
It depends on the site.
It depends on the system.
It depends on how much you are willing to spend.
And occasionally, it depends on realizing — too late — that the most important constraint on your deal was never underwritten.
How to Invest When Water Becomes the Bottleneck
Like any good investor, your initial thought could and should be something like, “How can I profit off of water scarcity in Austin?” Or any city with growing pains related to water.
Well, you could try Kyle Bass’ approach… but it will be extremely expensive and fraught with litigation and also make you a lot of enemies.
Or you could focus on minor redevelopments of existing sites. Basically a property grab-and-hold strategy, essentially skirting under the radar of new water re-use and water sustainability rules. I have a good friend who recently launched a real estate investment firm to pursue this strategy (if anyone wants an intro, let me know).
You could also invest in submarkets outside of growing cities with extra water capacity. However, you may run into issues if the denser parts of a city start claiming that water for themselves.
My favorite: You could invest in water infrastructure and technology. Why not build the tech behind desalination plants like Israel’s? Make your tech as easy as possible to work with. Of course, you’ll be playing the long game with regulatory bodies and always run the risk of a sort of eminent domain like we saw with NVIDIA. But honestly, if you’re doing as well as NVIDIA has, I think you’d be happy with that outcome.
It’s tempting to treat this as an Austin story. The Greenbelt starts drying up, the lakes fluctuate, the city gets religion about conservation, and developers grumble about purple pipes. But the underlying dynamic — growth running into infrastructure that doesn’t scale cleanly — is not unique.
If you are buying land, underwriting development, or considering moving in to a fast-growing city, the implication is fairly straightforward.
Water is no longer something you check once. It is something you check twice, maybe three times.
This will, over time, get priced in.
But markets are not always fast at pricing things that are hard to see.
This essay grew out of a Build Order conversation. If you haven’t caught it yet, you can watch all our episodes on all your favorite platforms: Substack, YouTube, Spotify, Apple Podcasts, Pocket Casts, iHeartRadio, and Overcast.
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