Water Stress Threatens Data Center Viability in 2023

Executive Summary

Two-thirds of data centers built or under development since 2022 are located in water-stressed regions, exposing a structural vulnerability in how the industry selects sites. Water availability is emerging as a first-order constraint alongside power and fiber—not a secondary environmental consideration. Developers who continue to ignore water risk face permitting friction, operational disruption, and regulatory backlash. Those who incorporate water scarcity into site selection now stand to capture a shrinking pool of viable locations before the market prices that scarcity in. The InfraSale takeaway: underwriting a data center site without a water availability analysis is no longer defensible.

What Happened

Roughly two-thirds of data centers built or placed under development since 2022 are sited in water-stressed regions, according to newly surfaced location intelligence data. This figure encompasses both operational facilities and projects currently in the development pipeline, meaning the exposure is not historical—it is actively compounding.

The concentration of digital infrastructure in water-scarce areas reflects a decade-long site selection bias toward low-power costs, favorable tax treatment, and established fiber corridors—criteria that did not systematically weight water availability. Phoenix, the Las Vegas valley, and portions of the Mid-Atlantic and Texas markets are canonical examples of high-demand data center clusters that also face documented water stress.

Industry context: Data centers are significant water consumers. Large hyperscale facilities can use millions of gallons per day for evaporative cooling towers, a figure that scales with IT load and ambient temperature. In water-stressed basins, that consumption profile increasingly conflicts with municipal, agricultural, and ecological demand.

The underlying data and analytical framework come from location intelligence research focused on climate risk, grid resilience, and resource management as drivers of data center site viability.

Source: Google Alert - Solar Energy

Why This Matters

Water stress is a threat multiplier. It does not operate in isolation—it interacts with heat, power demand, and regulatory capacity in ways that can cascade into project cancellation or operational curtailment. A facility that clears interconnection and secures permits can still be stopped or throttled if a state water authority determines the withdrawal rights are unsustainable.

Several western states have already moved in this direction. Arizona's Department of Environmental Quality and local municipalities in the Phoenix metro have begun scrutinizing large-scale water users more aggressively. Industry context: Similar regulatory tightening is being watched in Nevada and parts of the Southeast, where aquifer depletion is an emerging policy issue.

The financial exposure is asymmetric. A developer who built in 2021 assuming stable water access now holds an asset whose long-term operational costs and regulatory standing are harder to model. For projects still in pre-development, the window to course-correct remains open—but narrowing.

This story signals a structural shift, not a cyclical one. As AI workloads drive hyperscale power density higher, cooling water demand rises in lockstep. The problem gets harder before it gets easier.

Power & Interconnection Impact

Water and power are not independent variables for data center operators. Thermoelectric power generation—which supplies a significant share of the grid in many data center markets—is itself water-dependent. In drought conditions, power plant output can be derated or curtailed, creating a dual constraint: less water for cooling the data center and less power from a grid that is also water-stressed.

Assumption: In markets where grid operators draw on water-cooled generation assets, prolonged drought could tighten available capacity during peak summer demand, compounding interconnection queue delays that already stretch 3–5 years in constrained markets. Interconnection strategies in climate-risk regions should now incorporate water availability overlays as part of grid resilience modeling, not as an afterthought.

Developers evaluating substation proximity and transmission access should simultaneously assess whether the generation resources feeding that substation are water-dependent—and how those resources perform under stress scenarios modeled for 2030 and 2040 climate projections.

Land, Zoning & Permitting Impact

Permitting risk in water-stressed jurisdictions is rising. Local governments and state environmental agencies are beginning to incorporate water use assessments into conditional use permits for large commercial and industrial developments, including data centers. A project that would have sailed through environmental review in 2019 may now face a full water impact study as a permit condition.

Zoning frameworks have not uniformly caught up, but the direction of travel is clear. Municipalities in water-scarce regions are watching residential and agricultural users compete with industrial-scale digital infrastructure for the same constrained resource. That tension is politically salient and will produce regulatory action—the only question is timing and form.

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Developers should anticipate that future entitlements in stressed basins will include water use caps, recycled water mandates, or cooling technology requirements (air-side economization, liquid cooling) as conditions of approval. Projects designed now without addressing water efficiency are likely to face retrofit costs or permit modifications before they open.

Environmental review timelines in these regions should be modeled conservatively. Add 6–18 months to standard assumptions in markets where water rights adjudication or impact studies are likely triggers.

Investment Takeaway

Water risk is an underwritten blind spot. Most current data center valuations do not explicitly discount for water availability risk. As regulatory scrutiny increases, that gap will close—and assets in stressed basins will reprice accordingly.
Operators with water-efficient cooling architectures hold a durable advantage. Facilities using closed-loop liquid cooling, air-side economization, or near-zero water usage effectiveness (WUE) designs will face fewer regulatory headwinds and command better insurance and financing terms.
Greenfield sites in water-abundant regions are a scarce and appreciating asset class. The Pacific Northwest, upper Midwest, and portions of the Appalachian corridor offer water access that is increasingly rare relative to the pipeline of demand.
Stranded asset risk is real but long-dated. Near-term cash flows from existing facilities in stressed areas are not immediately impaired—but underwriting exit cap rates without a water risk haircut is a modeling error.
Sustainability credentials will become a financing lever. Lenders and institutional equity are increasingly incorporating ESG water metrics. Assumption: Projects demonstrating measurable water efficiency will access cheaper capital as this criterion becomes standardized in credit underwriting.

InfraSale Market Angle

For developers actively sourcing data center sites, water availability has graduated from a footnote in the environmental section to a primary filter—on par with substation proximity and fiber access. The practical implication: site screening should now begin with a water stress overlay before advancing to power and permitting diligence. Sites that clear on water are becoming rarer, and first movers are identifying them before the broader market prices in scarcity.

Landowners in water-abundant regions holding parcels with industrial zoning or agricultural conversion potential are sitting on underappreciated optionality. That value will become more legible to developers over the next 24–36 months as the pipeline of viable water-secure sites tightens.

Local governments in jurisdictions with stable water rights and available transmission capacity have a narrow window to position proactively—streamlined permitting for water-efficient facilities can become a competitive differentiator in attracting investment against water-stressed peer markets.

Market Signal

Location: Unspecified
Primary Issue: Water availability for data centers
Infrastructure Theme: Resource management
Who Benefits: Developers focused on sustainable practices and water-efficient site selection
Who's at Risk: Investors in data centers located in water-stressed areas
InfraSale Takeaway: Evaluate site selection criteria based on water availability and sustainability.

Take Action

Water-secure sites with data center-viable power access are among the most sought-after and least advertised infrastructure assets in the current market. If you are holding or developing a site with strong water rights and grid access, now is the time to put it in front of capital that is actively looking. Browse available powered land and DC sites.

FAQ

How does water scarcity affect data center operations?

Data centers rely on large volumes of water for cooling, particularly in evaporative cooling systems used by hyperscale facilities. In water-stressed regions, access to that water can be constrained by drought, regulatory curtailment, or competing municipal demand—forcing operators to reduce load, invest in costly cooling retrofits, or face permit violations. Long-term, facilities without a water resilience strategy face both operational and regulatory exposure.

What should developers consider for site selection in water-stressed areas?

Beyond the standard filters of power availability, fiber access, and tax incentives, developers should now evaluate water withdrawal rights, proximity to recycled water sources, and local regulatory posture toward industrial water users. Zoning and conditional use permit requirements are evolving quickly in stressed basins, and projects that don't anticipate water efficiency mandates may face redesign costs or permitting delays late in the development cycle.

Are there investment risks associated with data centers in water-stressed regions?

Yes, and those risks are currently underpriced in most asset valuations. Regulatory tightening, operational curtailment risk, and ESG-driven financing constraints all represent financial headwinds for facilities in stressed basins. Assumption: As institutional lenders standardize water risk metrics in credit underwriting, assets without documented water efficiency measures will face higher costs of capital and compressed exit multiples.

What cooling technologies reduce water dependency for data centers?

Air-side economization, closed-loop liquid cooling, and direct chip cooling are the primary alternatives to evaporative cooling towers. These approaches reduce or eliminate water use effectiveness (WUE) exposure, though they carry higher upfront capital costs and may require specific climate conditions or facility designs to operate efficiently at scale.

How are local governments responding to data center water demand?

Industry context: Several municipalities in the western U.S. have begun requiring water impact assessments as a condition of large-scale development approvals. Some jurisdictions are imposing water use caps or mandating recycled water use for industrial cooling. The regulatory response is still uneven, but the trend line is consistent—expect permitting requirements to become more stringent in stressed basins over the next three to five years.