The New York real estate industry is fuming. New legislation might force landlords to pay the hefty broker’s fees that tenants have traditionally paid to real estate companies.
Should the law pass, many landlords might skip brokerages to preserve their cash flow. They won’t get much sympathy from tenants, though. With soaring New York rental prices and the city caught in an affordability crisis, renters are struggling to pay the sky-high fees brokers charge—usually 10% to 15% of the annual rent, not including a security deposit and first month’s rent.
The move would change the composition of real estate in New York City—one of the most expensive markets in the country.
The State of New York City’s Rental Market
Renters comprise over two-thirds of the city’s households and hold huge sway in elections. Their frustration at the exorbitant broker fees is understandable: They never hired the brokers representing the apartments, and being forced to pay thousands of dollars for the privilege has been a cause of resentment for years. What’s especially grating is the fact that in other cities, the landlords, not the tenants, pay the broker’s fees.
“In most businesses, the person who hires the person pays the person,” Agustina Velez, a house cleaner from Queens, told ABC News. She said she recently paid $6,000 to switch apartments. “Enough with these injustices. Landlords have to pay for the services they use.”
However, New York’s real estate industry is unlike any other. For every multimillion-dollar condo generating six-figure commissions for brokers, there are thousands of brokers whose bread and butter is trekking around the city, showing apartments to potential clients.
With battle lines drawn, both sides have a lot at stake. Soaring rents mean upfront expenses for tenants of average-sized apartments outside Manhattan routinely exceed $10,000, or about 14% of their average annual income. Only one in five renters had the available cash on hand to afford to move into an NYC rental. For many would-be tenants, it often means incurring credit card debt just to find a place to live.
“It’s an additional fee in an already expensive and competitive market,” Councilman Chi Ossé, the bill’s sponsor, told the New York Times. “It’s holding a lot of people back from finding new homes, and it’s pushing people out of the city.”
New York City Rents Continue to Rise
It seems foolish to think that during the pandemic when thousands of residents fled the city, many people doubted whether New York City could survive. With office buildings finally showing signs of recovery, New York rents have steadily risen, with no respite in sight.
The Rent Guidelines Board, which sets rent increases annually for rent-stabilized apartments, voted to increase rents for the third straight year by 2.75% on a one-year lease and 5.25% on a two-year lease this year for their approximately 2 million tenants. According to NYC listings site StreetEasy, the median asking rent reached $3,800 in May—the highest since the site started tracking data in 2010. Though the increase year over year was 2%, this follows a double-digit increase in 2023.
NYC Tenants and Agents Are Fighting to Make Ends Meet
Considering the median salary in New York City is $73,950, the average tenant is expected to fork out around 20% of their annual salary after taxes to secure a place to live.
Meanwhile, when a broker splits their rental commission with a showing agent, their agent usually receives around 60%. So if an apartment rents for $4,000/month, which is $48,000 per year, and a broker receives 10% of that, which is $4,800, an agent receives $2,880. And according to Zip Recruiter, the average annual salary for an NYC real estate agent is $90,773.
NYC Faces a Chronic Lack of Housing
It’s not as if there are an abundance of apartments available for rent. In April, New York Governor Kathy Hochul and the state legislature reached a deal to boost residential construction in the state’s most populous city. The city has been beset by a chronic housing shortage and escalating homelessness, further exacerbated by the migrant crisis.
“The fact that New York City’s vacancy rate is at 1.4% should be scaring the crap out of all of us,” Assembly Speaker Carl Heastie, a Democrat, told reporters at the time, citing a report that found the vacancy rate for rentals in the five boroughs to be the lowest it had been in more than 50 years. The occupancy of homeless shelters surged this year as buses of migrants arrived in the city.
No-Fee Apartments on the Rise in NYC
With such high upfront fees to live in NYC, it’s hardly surprising that the number of no-fee rentals, which see landlords rent apartments instead of brokers, has been increasing in NYC. StreetEasy even has a filter for such apartments, which are understandably popular and go fast. Should a broker’s commission be transferred to landlords, expect no-fee rentals to explode, with landlords and their affiliates choosing to go through the screening process themselves instead of paying a broker.
“This is the start of a top-down, government-controlled housing system,” Jordan Silver, a broker with the firm Brown Harris Stevens, told NBC New York. “The language is so incredibly vague, we actually have no idea what this would look like in the world.”
Ryan Monell, vice president of the Real Estate Board of New York, said the complexities of the New York City market made it unique. “It’s a misnomer to compare New York to other cities,” he said in an interview with NBC New York. “This is really an exceptional market.”
New York City Mayor Eric Adams, who once worked as a real estate agent while also serving in the NYPD, struck a neutral stance, saying that renters are not required to pay broker fees in city-financed affordable housing. “We are reviewing the legislation and taking time to understand any potential impacts,” a spokesperson for the mayor said noncommittally in an interview with the New York Times.
NYC Is Facing an Exodus of Lower-Income Residents
Facing exorbitant housing costs, NYC is also struggling to keep its workforce in the city. U.S. Census data shows about 78,000 people left the city in 2023.
However, that only tells half the story. In 2022, the city lost more than 126,000 residents. From April 2020 to July 2023, it lost almost 550,000 residents or more than 6% of its population. Department of City Planning spokesperson Casey Berkovitz said 180,000 migrants had come to the city since spring 2022 and that 64,600 were still in the city’s care. Migrants, though, generally do not join the workforce or rent apartments.
Although many people believe the city will eventually recover its numbers, it’s no coincidence that the poorer neighborhoods in the Bronx and Brooklyn were hemorrhaging the most people, with the wealthiest borough maintaining its numbers. Should this continue, the population of New York City will increasingly skew toward the rich living in expensive Manhattan apartments. High rents mean these apartments dominate the upper regions of the no-fee rental categories.
Final Thoughts
Given the cost of living, it’s easy to see why so many people are leaving New York City. Despite that, the city’s chronic shortage of affordable housing and the relatively modest income of the average real estate agent means both sides have valid arguments for and against ending broker’s fees from tenants. And as with many New York laws, only an either-or solution will suffice.
Is a compromise feasible where landlords and tenants split the broker fees? I can understand the issues that may arise from this arrangement (either party might try to get out of paying their share, or landlords might cut side deals with brokers, such as lower fees with the promise of further listings). However, should watertight legislation be able to enforce this arrangement, it seems one of the most logical solutions.
Given the difficulty of evicting tenants in New York City, having an experienced broker robustly screen a tenant, including a background check, is a fee that a landlord should take as a cost of doing business. Ultimately, securing the right tenant and paying for the service could save them a fortune in the long run, should they rent to the wrong person.
As with most contentious real estate issues, it’s hard to believe that a compromise appeasing both sides is impossible.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
