Legal: Growth of “build-to-rent” housing in the construction industry

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Special to North Carolina Construction News

Home prices continue to rise in North Carolina and across the nation.  A recent Forbes report noted that, beginning in mid-May or June of 2020, home buyers were offering to pay well above listing prices and some were even making non-refundable due diligence deposits of up to $100,000 in order to secure a home.  Although the market is starting to cool, inventory remains low and prices are still rising (albeit more slowly than in years past).  In the past year alone, home values have risen 2.6 percent.

North Carolina’s diverse landscape, ranging from mountains to an extensive coast and beaches, continues to make it an attractive state to live in.  In fact, North Carolina was second only to South Carolina as a top inbound state in North American Moving Services’ 2022 Moving Migration Report.  As a result, more and more people are finding alternatives to buying homes. They are instead choosing to live in “build-to-rent” homes in long-term rental arrangements.

Build-to-rent living arrangements are helping people cope with high cost of living expenses, ongoing inflation, rising mortgage rates and wage growth stagnation in urban areas throughout North Carolina.  This growing segment of the housing market, located primarily in suburban areas near high-quality schools and low crime, attract people who want the lifestyle of living in a house but the affordability or convenience of renting.

Build-to-rents are most common in the Sun Belt region and have a national average rent rate of $2,039 per month. As of 2021, build-to-rent properties made up 5 to 6 percent of all properties nationwide – and that share of the housing market is growing. The most prominent build-to-rent home developers are companies including REITs Invitation Homes, Tricon Residential, and American Homes 4 Rent.  While these companies often still buy existing and individual houses to operate and rent, strong demand and rising rent rates have incentivized developers to build entire new subdivisions of houses specifically for rental services.

North Carolina is one of only two states (Arizona being the other) that has a ratio of one thousand or more built-to-rent units planned or under construction, per every million of its residents. In fact, the number of built-to-rent homes being constructed in North Carolina is more than double the national average.  According to City Monitor, Charlotte ranked fifth nationally in the number of build-to-rent completions, coming in at 475 in 2022.  The city of Raleigh is another emerging market for new single-family rental homes.

As build-to-rent homes continue to gain prominence in North Carolina, some homebuyers are concerned that housing costs will be driven up, there will be limited availability of homes for purchase, and the nature of their neighborhoods will change. 

Although some owners would no doubt like to regulate where homes for rent can be located, North Carolina considers the regulation of land ownership as unconstitutional. This was explained in the 1981 case Graham Court Associates v. Town Council of Chapel Hill, 53 N.C. App. 543, 281 S.E.2d 418 (1981), where the North Carolina Court of Appeals ruled that zoning may regulate land use but not the form of ownership.  The appellate court reaffirmed that decision in City of Wilmington v. Hill, 189 N.C. App. 173, 657 S.E.2d 670 (2008), when it ruled that a requirement for owner-occupancy was an unconstitutional regulation of ownership and beyond the scope of delegated zoning authority.

These judicial precedents mean that local governments may not use zoning or land subdivision regulations to regulate build-to-rent developments any differently from owner developments. Basic land use and subdivision rules do still apply and include the types of activities permitted, design aspects, and the density of the development.

Also, there are North Carolina statutes that apply specifically to single-ownership homes, such as General Statutes 160D-802(c) (regulating plat requirements for land parcel divisions in single ownership) and 160D-910(g) (allowing the requirement of masonry curtain walls or skirting if land is owned, but not leased, by the homeowner).

Given the current trends, build-to-rent properties will continue to increase both in North Carolina and the rest of the country. This will diversify residential areas even more, as occupants who would not normally want to purchase outright now have the option of renting while still retaining the experience of living in a house.  Some property owners will likely be concerned about rental developments springing up around them. 

As of now, however, local governments may not regulate the development of rental home subdivisions any differently compared to owner-occupied houses. Common law and statutes may change this in the future, but at present homeowners can expect to see more renters in their neighborhoods. 

A.Bradley Eban is a lawyer at Conner Schenck PLLC in Raleigh. He can be reached at aeben@cgspllc.com or at (919) -208-2353.

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