New York City Renters Stand to Win Big if Landlords are Required to Pay Broker Fees

The PropertyClub Team
Feb 13th 2020
The New York Department of State unexpectedly banned broker fees for New Yorkers renting an apartment last week, throwing the local real estate industry into a whirlwind. Residential brokers are understandably furious and have already gone to court and obtained a temporary restraining order halting the ban, but for renters, the new rules might make life a lot easier. We’ve crunched over a week’s worth of data that shows the average New Yorker would save close to four thousand dollars, even if landlords increase monthly rents.

New York City is well known for its extremely competitive and pricey rental market. Traditionally, many renters have been expected to use real estate brokers and pay their commission fees, which, sometimes, can be as high as 15% of the annual rent. For example, for a $3,000 apartment in New York City, the broker’s fee could easily be as high as $5,400. Traditionally, this fee was paid by the tenant before he/she could sign the lease or take occupancy of the apartment.

In an unexpected addendum to last year’s Housing Stability and Tenant of 2019, state regulators blindsided the real estate industry by stating that real estate brokers could no longer collect broker’s fees from tenants if they were hired by the landlord/owner. The Department of State clarified that brokers can still charge commission fees, but the landlord must pay the fee unless the tenant hired the broker. Proponents see this addendum as “fair,” as it ensures that the person who hired the broker is the one responsible for paying the commission fee. Notably, this is how broker fees work for rentals in the majority of states around the country.

The media exploded last Thursday when the news broke out. Real estate brokers saw red, and two of the biggest industry agencies in the city, REBNY and the New York State Association of REALTORS, Inc., have already filed a lawsuit, which resulted in a temporary restraining order against the DOS's guidelines that forbade brokers who represent landlords to collect fees from tenants.  Given that broker fees typically amount to 15% of an apartment’s annual rent, it’s easy to see why industry professionals are upset. Landlords aren’t too happy, either, as they’ll now have to pay the fees out of their own pocket, or market the properties themselves and bypass brokers altogether. 

From a tenant’s perspective, the ban on broker fees is great news, as it makes life a bit easier for those trying to rent a decent apartment in NYC. However, when the news broke on Thursday, some experts predicted that brokerages would simply raise rents to make up for the missing broker fee. Naturally, our curiosity was piqued, and we wanted to see if that concern was valid. 

Affected Apartments saw Average Rent Increases of 6.1%

We combed through more than 7,000 NYC no-fee apartment listings from all the major players in NYC, including our own database, Corcoran, Douglas Elliman, Compass, and StreetEasy, to see what was the immediate effect of the new guidelines. As it turns out, the industry moves fast, and a lot of listings were quickly updated and displayed higher rents than before. Below is a breakdown of the percentage change in rents for properties across NYC boroughs, ranked in descending order. Be mindful, however, of the fact that not all brokers had a chance to update their listings, so we expect to see these numbers change again if the DOS guidelines are upheld. Also, while the change in monthly rent for the affected apartments is dramatic, overall, city-wide rents are more or less unchanged. 

Existing no-fee listings were obviously not impacted by these new changes, but listings that went from having a broker fee paid by the tenant to the landlord covering the broker fee showed significantly higher numbers. Roughly 10.6% of the properties we looked at showed an increase in rents of 10% or more, while close to 2% of properties showed an increase of over 15%. More than 70% of properties saw a rise in price equivalent to less than one months’ rent, or 8.33%. 

Citywide, average rents on the affected apartments experienced a 6.1% jump, with the highest increases recorded in Brooklyn (6.4%) and Queens (6.1%), followed by Manhattan (5.9%) and the Bronx (5.7%). 

Looking at different property types, we see that rents have risen 8.4% on affected multifamily units and 7.1% on townhouses. Co-ops are next, with an average increase of 6.4%, followed by rental buildings (5.9%) and condos (5.4%).

Properties listed by ‘the big three’ residential companies, namely Compass, Elliman and, Corcoran, showed an average increase of 7.2%, compared to an increase of 5.5% on listings from all other brokerages. Compass listings showed an increase of 6.7%, while Elliman listings saw a 7.4% increase and Corcoran listings saw a 7.8% increase. 

What are the long-term effects of the broker fee ban in NYC?

In most U.S. cities, broker fees are handled by the landlords, not by the tenants. New York City and Boston have been the exceptions, which is why many applaud the new rule imposed by the Department of State. For renters, the ban on these fees is excellent news, as housing costs in NYC are already super expensive, and finding a place to live can be a real challenge. Add to that broker fees, security deposits, one months’ rent upfront, moving costs, new furniture, and so on, and it becomes downright excessive. 

To make up for the elimination of broker fees, landlords will likely raise rents - and they’ve already started doing that, as we’ve already shown you. Brokers have continuously warned that landlords will increase the rent to account for the fact that they must pay a broker’s fee. However, the counter-argument is that state law already limits the amount that rents can be raised in the over 1,000,000 rent-regulated apartments, so at the very least, those tenants are still protected from rent increases prompted by this change.

Even more importantly, after crunching the numbers, it's quite clear that tenants still win, even in lieu of higher rents. We've taken a look at the neighborhoods in the list above, where rents have increased, to see whether this increase translates into more money out of the renters’ pocket or not. As it turns out, New Yorkers will actually be able to save up quite a bit of cash, even if rents do go up. 

Some Manhattanites Will Save Over $7K When Landlords Pay Broker Fees

The most significant changes following the broker fee ban, at least so far, seem to be in East New York, where average rents on affected listings are already 10.4% higher, and Harlem, where we see a 10.9% increase. Hamilton Heights, Williamsburg, Bed-Stuy, and the Lower East Side are not too far behind, each showing an increase of over 8%. However, even in the neighborhoods where rents on affected apartments are already over 10% more expensive, New Yorkers will end up actually saving money if they no longer have to pay a broker fee. 

After combing through thousands of listings, we ended up with a list of 39 New York City neighborhoods where rents are already higher on affected listings following the new rules. In all of these neighborhoods, tenants will actually end up saving money over the course of a year, even with a higher monthly rent. Moreover, the broker fee ban in these neighborhoods will help renters save a combined $256 million a year. 

The biggest difference, at least so far, would be in Battery Park City, where renters would end up saving $7,413 if they’re not required to pay a broker fee when they move in. In this NYC neighborhood, the 15% broker fee amounts to an eyebrow-raising $10,017, which is a lot of money for the average renter. The situation is similar in Tribeca, where broker fees amount to $10,154; here, tenants would end up saving $5,280, even with a higher rent. 

The biggest rent hikes so far seem to have occurred in East New York (10.4%) and Harlem (10.9%). That’s a pretty big increase in rents to happen in just a few days, but even here, New Yorkers would end up saving over $1,000 without the broker fees. 

Landlords Will Likely Offer Better Deals on Long-Term Leases

One interesting trend we noticed was that some landlords started to offer a lower rent on 2-year leases. "Having landlords pay broker fees changes the game completely," says PropertyClub CEO Andrew Weinberger. "Nowadays, if you're signing a 1-year lease and paying a 15% broker fee the landlord knows that raising the rent in year two will be relatively easy, as the typical 3% increase pales in comparison to the broker fee and moving expenses you paid to move in," explains Andrew, "but if the landlord is responsible for covering the brokers fee, tenants are in a much better position when negotiating a long term lease or a renewal."

Tenants Are Better Protected Against Future Rent Hikes

A lot of folks in the real estate industry will surely point to the 6.1% increase in asking rents on affected units and claim that renters will lose in the long-term as that increase adds up over time. They'll claim that you'll be better off by year 2 or 3 had you just paid the broker fee, but that's not necessarily true as they're ignoring the fact that the typical NYC landlord will raise rents by approximately 3% each year. That's easy to do when landlords know that tenants' choice is to pay up or go back on the hunt for a place and deal with a whole new round of broker fees, move-in expenses, and related headaches. The new DOS guidelines take away landlords' leverage and put tenants in a much better position to negotiate renewals. 

Initial Price Hikes Indicate a Knee-Jerk Reaction

When looking at the statistical mode, 14.7% of listings are jumping by approximately 8.33%, equivalent to one month's rent, which would indicate that the rent increases aren't exactly well thought out. "Arbitrarily increasing prices the way some landlords have isn't particularly wise," explains Andrew Weinberger. "We see a big portion of listings that are now priced right above common search parameters, for example, at $4,050 instead of $4,000," continues Andrew. "I'd expect that if the DOS guidelines are upheld, we'll see most of these price increases be adjusted downwards as brokers and landlords focus more on properly pricing listings to maximize traffic." 

The NYC Broker Fee Ban - Brokers’ Plight, Renters’ Delight

To sum up, the elimination of the broker fee in NYC is an upsetting measure for brokers and landlords, who will most likely end up losing money. The ban comes on the heels of last year’s new rent laws, which tend to favor tenants and not landlords or ‘landlord brokers.’ For renters, however, the broker fee ban is extremely good news, since finding an affordable apartment in the city is hard enough already. Brokerages have been quick to react to the ban, updating listings to show an increase in rents, but even so, it’s a better situation for renters in the long run, as they’ll end up saving money.

Data sources:

PropertyClub, Compass, Elliman, Corcoran, StreetEasy, Zillow, RentCafe

Proprietary research.