Gottlieb Law, PLC provides this article for information purposes only and nothing herein creates an attorney-client relationship. You should not take any actions in reliance on any of the information contained herein without consulting with qualified legal counsel first and reading this article is not a proper substitute for seeking legal advice of your specific situation. Laws change over time and you should seek counsel to discuss any specific legal questions.
Arizona’s Housing Crunch Just Hit a New Obstacle: Groundwater Rules
Arizona’s water crisis isn’t new, but what’s unfolding in 2025 has shaken up the state’s homebuilding industry. With a rising population, long-term drought, and growing pressure to regulate groundwater use, the Arizona Department of Water Resources (ADWR) has introduced major changes to groundwater rules and how new developments are approved.
Builders are now facing halted projects, tighter permitting hurdles, and a growing cloud of legal uncertainty. Homebuilders are challenging the new rules in court. Lawmakers are scrambling for solutions. And local economies are caught in the middle of the current changes.
This article walks through how the situation unfolded, what the latest Phoenix-area groundwater rules mean, and what developers and property owners need to know. If you’re navigating this regulatory shift, this article is a great place to start.
The Backstory: Why Arizona Cracked Down on Water Use
Arizona’s relationship with groundwater has always been complicated. In a state where rivers run dry and rainfall is scarce, underground aquifers have long served as both a lifeline and a point of contention. For decades, rapid population growth and suburban expansion pushed the limits of groundwater use, especially in the state’s desert metro areas.
Recognizing the danger of unchecked pumping, Arizona passed the Groundwater Management Act in 1980, a landmark piece of legislation at the time and still one of the most comprehensive state-level water laws in the country. The law divided the state into Active Management Areas (AMAs) — high-growth regions with elevated water demand — and put in place a tiered system for managing groundwater withdrawals.
At the heart of the legislation was the Assured Water Supply (AWS) program, which created a clear legal threshold: any new residential or commercial subdivision within an AMA must prove it has access to a 100-year supply of water before receiving a certificate to build. This water could come from groundwater, surface water, reclaimed sources, or a mix of them, but the underlying intent was to prevent communities from being built on empty promises and dry wells.
For years, the AWS program allowed Arizona to balance growth and conservation, but that balance has grown more fragile. The rise in long-term drought conditions across the Southwest, combined with decreased Colorado River allocations and persistent over-reliance on groundwater pumping, put increasing strain on the state’s water security. The AWS rules remained on the books, but the data behind those rules began to shift.
In 2023, the Arizona Department of Water Resources (ADWR) published updated groundwater models that significantly altered the outlook for long-term water planning. The findings revealed that within the Phoenix AMA, groundwater supplies would fall short of meeting projected demand by 4 percent over the next 100 years, representing a staggering 4.86 million acre-foot deficit. Although 4 percent may sound small, the scale of urban development in the Phoenix metro means even a modest shortfall translates to tens of thousands of homes and substantial economic implications.
Faced with those projections, ADWR made a consequential policy decision. It halted the issuance of new Assured Water Supply certificates that relied on groundwater in the Phoenix AMA. This wasn’t a symbolic move. It functionally shut the door on numerous proposed developments, especially in high-growth suburbs where groundwater remained the primary water source.
To further tighten oversight, ADWR introduced two new criteria into the AWS review process: “unmet demand” and “water depth.” Instead of only looking at whether a developer could prove water availability on a specific parcel, the department shifted to a broader, regional analysis. “Unmet demand” assesses how much water is already being overdrawn in a particular area, while “water depth” reflects the physical depth of groundwater in the aquifer and whether it’s economically or technically feasible to access it. This represented a significant change in approach, replacing parcel-level assessments with a broader focus on regional groundwater impacts.
This new framework meant that even if a builder could pump water on-site today, the broader groundwater conditions could block development altogether. It also left many in the development community scrambling, as previously planned projects no longer met the state’s updated criteria.
The policy shift was not just a response to dry numbers. It reflected a growing awareness among state officials that Arizona’s water future demands a higher standard of scrutiny. With rising temperatures, increasingly scarce river flows, and exploding housing demand, the state’s margin for error has narrowed. These changes to AWS enforcement marked the beginning of a broader shift in Arizona’s approach to groundwater management, with a stronger focus on long-term water reliability over short-term growth.
The 2024 Changes Impacting the Industry
Following the release of ADWR’s updated groundwater projections, state regulators moved quickly to tighten oversight. On November 25, 2024, the agency finalized and enacted a set of far-reaching changes under the Alternative Path to Designation of Assured Water Supply (ADAWS), which is a framework originally designed to provide flexibility in the AWS certification process for large master-planned communities and municipalities. This time, however, the changes were stricter for most builders in the state.
The new water rules package represented a significant shift in how Arizona evaluates water adequacy for future developments. The most notable change was the move from site-specific hydrologic testing to regional groundwater modeling. Historically, developers had been able to hire hydrologists to run local aquifer tests and submit those findings as proof of sufficient supply. That approach allowed even small-scale projects to move forward if they could demonstrate local access to groundwater, regardless of the broader conditions in the area.
Under the new rules, those localized tests no longer hold weight on their own. Instead, ADWR now relies on area-wide groundwater models developed and maintained by the agency itself. These models consider the cumulative impact of pumping across entire basins or sub-basins, not just the conditions on a single parcel. This approach evaluates the water needs of each new development in the broader context of existing demands on the same aquifer, such as those from municipalities, industry, farms, and other residential areas.
The metrics for unmet demand and water depth are now part of the regulatory baseline. ADWR will reject applications for developments in areas where unmet demand is significant or groundwater levels have dropped too low, regardless of whether wells are still functioning.
The consequences were immediate. Communities like Queen Creek and Buckeye, both major hubs for suburban growth, were hit especially hard. In these areas, much of the new housing stock relied on groundwater-based AWS certifications, many of which were still working their way through the approval pipeline when the rule changes landed. Practically overnight, those applications were frozen or rejected outright under the new modeling criteria.
Developers across the state described the rollout as abrupt and destabilizing. While ADWR had previously telegraphed a tightening of groundwater access, many in the homebuilding sector are alleging they had no opportunity to provide formal comment on the specifics of the new rules. They claim the process included no public hearing, no economic impact review, and no formal rulemaking docket, even though the Arizona Administrative Procedure Act requires those steps for significant policy changes.
This lack of process has become a core issue in ongoing litigation, but the business impact was immediate and measurable. Projects that had already secured preliminary approvals or had invested heavily in planning and engineering suddenly found themselves in limbo. For developers with large landholdings in growth corridors like the West Valley, the financial risks multiplied almost instantly.
What’s more, the new modeling approach has created a moving target. Since groundwater models are updated regularly based on new data, a site that qualifies for certification today may not meet the same criteria six months later. That unpredictability makes it significantly harder to plan long-term projects or secure financing, particularly in fringe areas without guaranteed access to municipal water systems.
In the span of weeks, what was once considered a manageable regulatory hurdle turned into a significant barrier to entry. For smaller builders and investors, especially those without the resources to negotiate alternative water arrangements, the new rules have raised the cost of doing business and reduced the feasibility of entire subdivisions.
The shift also pointed to a broader change, as Arizona is no longer issuing water certifications based solely on engineering feasibility. Now, policy, modeling assumptions, and sustainability thresholds play a much larger role in determining whether a project gets the green light.
Legal Blowback: Builders Take the Fight to Court
The response from builders came quickly. On January 22, 2025, the Home Builders Association of Central Arizona filed a lawsuit challenging the new water rules. Their claim focused on ADWR’s adoption of metrics like “unmet demand” and “water depth,” arguing the department lacked the authority to impose these standards without going through the proper legal process.
A second lawsuit filed by the Home Builders Association of Central Arizona and the Arizona House and Senate against ADWR followed on March 10, 2025. That case targeted a newly imposed 33.3% groundwater fee, arguing it unlawfully raised housing costs and lacked any basis in state law.
Homebuilders argue the new rules:
- Represent regulatory overreach by ADWR
- Were imposed without following Arizona Revised Statutes
- Have inflicted economic harm on builders, buyers, and local communities
These legal fights are now central to the debate over Arizona’s water policy, and they raise questions about how far agencies can go in restricting development. If your business is facing uncertainty in this area, it may be time to talk with an Arizona lawyer experienced in builder disputes and litigation.
Legislative Efforts Collapse as Division Grows
In December 2024, Arizona legislators introduced House Bill 2299 in an effort to carve out exemptions for certain projects in Queen Creek and Buckeye. Sponsored by Rep. Gail Griffin, the bill aimed to allow developers to move forward using outdated groundwater models that were previously accepted.
While the bill had support from many Republicans and homebuilders, it faced strong resistance. Environmental groups, Democratic lawmakers, and even some Republicans pushed back, warning that the exemptions would undermine long-term water security.
On March 12, 2025, HB 2299 failed in the Arizona House by a vote of 29 to 26. With that outcome, the possibility of a legislative fix effectively disappeared, leaving developers with fewer options and more pressure to adapt to the current rules.
What This Means for Developers and Local Economies
The consequences of the new water regulations are already visible in housing markets and city planning departments.
- Builders are pausing projects while they reassess water availability
- Permitting delays are stacking up, especially in groundwater-reliant zones
- Construction costs are increasing as developers consider new water sourcing methods
For investors and landowners, the uncertainty poses real financial risks. Land value in affected areas could drop, and some cities may see slower population growth. Municipal tax bases may shrink as developments get shelved or relocated. All of this underscores the importance of having a legal team with experience in ADWR compliance, housing development restrictions, construction litigation and water-rights disputes.
Where Gottlieb Law Comes In
Whether you’re planning a new subdivision or trying to rescue a stalled project, Gottlieb Law offers the legal support needed to make informed, strategic decisions in this climate. As a respected Arizona real estate law firm, our experienced attorneys understand the complexities tied to groundwater regulations and development law.
Here’s how our law firm can help:
Expert Regulatory Guidance
Gottlieb Law can explain the current ADWR regulations, assess project eligibility, and help clients determine the best path forward. Our legal team stays on top of regulatory shifts so clients can act with confidence.
Litigation and Dispute Resolution
From assured water supply litigation to broader constitutional challenges, Gottlieb Law represents key real estate players in court and in negotiations. Our experience with real estate and Arizona law helps craft strong, results-focused legal strategies.
Compliance and Permitting
Navigating water certifications will require more than paperwork going forward. Gottlieb Law can work alongside professionals like hydrologists, engineers, and local planners to ensure projects meet all regulatory requirements.
Development Strategy
Our firm helps clients choose viable locations, explore alternative water sources, and work with municipalities to assist with development strategy. If your project touches groundwater policy in any way, working with an experienced Arizona real estate attorney could be the difference between delay and success.
If your business or development project has been impacted by the recent water regulations, contact Gottlieb Law for a consultation. Our legal team can help you navigate the challenges and protect your interests.
Final Thoughts on Arizona’s New Water Rules
Arizona’s new groundwater rules are reshaping what’s possible in the state’s real estate landscape. For developers, investors, and municipalities, the stakes are high and the legal landscape is shifting fast.
These changes won’t resolve overnight. Lawsuits are pending, political debates continue, and ADWR shows no signs of backing down. Now more than ever, proactive legal guidance is essential.
Gottlieb Law is here to help developers make sense of the rules, avoid costly missteps, and continue building for Arizona’s future. Call Gottlieb Law today at 602-899-8188 or use our Contact Us page here to schedule your initial consultation.
Gottlieb Law, PLC provides this article for information purposes only and nothing herein creates an attorney-client relationship. You should not take any actions in reliance on any of the information contained herein without consulting with qualified legal counsel first and reading this article is not a proper substitute for seeking legal advice of your specific situation. Laws change over time and you should seek counsel to discuss any specific legal questions.
