Water’s price conundrum

Before making the drive from Santa Barbara, Calif., to San Francisco after the final day of the Water Rights & Trading Summit – California (hosted by American Water Intelligence and WestWater Research, who produced an insightful and engaging event), I stopped to refuel. The price of a gallon of gas in California is among the highest in the United States, and the high price is credited with helping spur the development of fuel-efficient technologies.

As I pulled out of the service station and onto the highway, a downpour started, which lasted off and on most the way home. The rainwater, of course, is free. Anyone can collect it and use it for just about anything they want, regardless of whether it’s put to good use or not. The cost of water generally is just about free, too. The average water bill for a single-family home can be anywhere from $30 to $100 a month, depending on the market and the amount used, which is about as close to free as a consumer product can get.

The frustration at a lack of acceptance of market-based pricing for water consumption was clear at the summit. From the sessions to the conversations on the patio at the Bacara Resort, I heard one iteration or another of the question, “When will people see the value in pricing for the true cost of water?”

For the uninitiated to the investment thesis of water, two days of discussions on the subject will open your eyes. It did mine. As I was driving home, I now saw the rain like the precious commodity that it is. So why not allow the laws of supply and demand to influence the price?

Water, I was reminded, is a sovereign asset; the private sector can use it, but for all intents and purposes the public sector owns it. And in the water business there is a lot of pushing and shoving when it comes to access; as many speakers pointed out — if you want to invest in water, be prepared for sharp-elbowed politics.

According to many at the summit, water investing is perhaps one of the greatest risk/reward payoffs there is, and it is hard to argue. Take, for example, the market-based bottled water market, where consumers pay more than $6 for a gallon of Evian, more than the cost of a gallon of gas in California and incredibly high compared with the cost of water used by a family of four for a month. You get a sense of the value water investors believe can be realized.

Why exactly are the laws of supply and demand largely absent from the water market? “There is no other commodity that has the word ‘holy’ attached it — there is only holy water,” a speaker pointed out. People have a “visceral reaction” to how water is allocated and used, for obvious reasons. But with the cost of water so cheap for the consumer, clearly, the value of water has been cheapened as well.

Drew Campbell is senior editor of Institutional Investment in Infrastructure.

It’s that time again

In many markets across the nation, tenant demand for apartments is strong, vacancies are extremely low, and rents are approaching record highs. Which can only mean one thing: It’s time for developers to jump into action and oversupply these markets with a glut of new rental properties.

And although the apartment sector has a lot going for it — shifts in demographic, economic and social patterns underpin strong demand — more than a few market watchers have started to raise concerns about frothy pricing in the face of changing market conditions.

Building permits for apartments jumped 56 percent in the 12 months ended in February 2012. Approximately 70,000 units will come online in 2012 — about double the supply growth recorded in 2011 — and 150,000 to 200,000 units are forecast for 2013, according to Reis. The onset of apartment construction booms have been reported in a range of markets from coast to coast, including Boston, Houston, San Francisco and Seattle.

In a recent Bloomberg article, Ron Johnsey, president of Dallas-based research firm Axiometrics, notes, “Around the country, we are seeing this trend of [apartment] development concentrated in the urban core. If the operators, lenders and investors are not careful, the urban core submarkets will become overbuilt in a couple of years.”

Larry Gray is editorial director of Institutional Real Estate, Inc.