Troubled waters

This year's rapid run up in the price of water rights in the Truckee Meadows adds to the cost pressure on new industrial and commercial projects.

In most cases, developers appear to be swallowing hard, folding the price of water right into their spreadsheets and hoping that tenants will be willing to pay higher rents to cover the costs.

But folks in the development business say some projects have been pulled back for further review as the price of water rights continues its dizzying spiral up from about $3,000 an acre-foot early this year to $40,000 or more this autumn.

The sharp increase in water prices in the Truckee Meadows may create opportunity, meanwhile, for developers with land in outlying areas.

The reason for the increase is a straightforward matter of supply and demand, says Lori Williams, general manager of Truckee Meadows Water Authority.

"There's a limited-supply market.We have escalating demand,"Williams says.

Developers need to bring a specified amount of water with them when they start a project in TMWA's service area.

For a new home, for example, they're typically required to buy half an acre-foot.

For commercial and industrial projects, the amount is greater but it varies widely, depending on the amount of water the development would use.

In the past, TMWA bought water supplies on the open market, and developers purchased their needs from the agency.

But it sometimes takes weeks or months these days for TMWA to find the water to fulfill developers' requests, so developers are going into the open market themselves to buy water.

That, in turn, set off the current bidding war.

"We cannot compete with residential developers for water any more," says Par Tolles, area director in Reno for Trammell Crow Co, which develops office and industrial properties.

Office and industrial developers in the Reno-Sparks area already were challenged by higher prices for land, and then by sharp increases in construction costs.Now, Tolles says, Trammell Crow thinks costs have outpaced the company's ability to recoup its investment through rents on some proposed projects.

"It's a matter of how much the tenants will pay," he says."There has to be a return on investment."

Adds Marc Markwell, development manager at DP Partners, a major industrial developer," Water is one of the factors that is putting more and more pressure on making these deals pencil."

Privately, developers say that some small retail projects in Reno and Sparks have been pulled off the drawing boards in recent weeks because higher water prices raise doubts about their economic viability.

Industrial projects, particularly distribution centers, aren't big water users and haven't been significantly slowed.

As a rough rule of thumb, distribution centers need to come up with an acre-foot of water or less for each acre of development, and many owners of industrial land nailed down water supplies before prices began rising, says Paul Perkins, senior vice president in the industrial properties group of Alliance Commercial Real Estate Services in Reno.

So far, the rising prices haven't created a noticeable ripple of interest from companies looking outside the Reno-Sparks area for sites with less-expensive water.

"But water availability who has it, and who doesn't always comes into the equation," says Larie Trippet, business development manager for Northern Nevada Development Authority.

The Carson Citybased agency works throughout northwestern Nevada.

Carson City development officials see the rising price of water rights in Reno and Sparks as an opening for their efforts to woo new industry to the city.

Joe McCarthy,who heads Carson City's economic development effort, notes that the city doesn't require developers to purchase water rights as the price of hooking into the water system.

"Our infrastructure is in place," he says.

"It's one of the selling points that we emphasize."