The Game Is Changing in the Rental Market. So Landlords Are Playing By New Rules. And Brokers are Soon to Follow.

In 2019, owners of NYC residential buildings learned that they would not necessarily be able to charge higher rents to vacant units that they renovated. And they could do just about nothing to get rent-regulated tenants to move out, either. This situation has radically changed the value of rent-regulated rental buildings; they are worth a lot less than they used to be. Simple math. The lower the possible rent roll, the lower the value. 

What can be done?

As a landlord, it may help if you have a little scale, so you can spread out the pain over a few buildings. Or you can leverage that scale. For instance, I had a shocking conversation with a smaller Manhattan landlord, who has about 400 apartments on Manhattan's Upper West Side. This landlord mentioned that he is presently leaving over 50 apartments vacant, because he is not legally allowed to charge more than what is governed by New York City's Rent Stabilization Laws. In one building, it costs him approximately $1100 per unit per month to operate it. Here's his dilemma: If he cannot charge more than $750 per month, he would be locking in a $350/month loss for every apartment.

However, this landlord realized that he can create employment agreements that come with apartments. That is, if he has two painters he wants to hire, he pays them in the form of money, plus use of an apartment. It's not a lease, per se, but instead a license that comes with an apartment until they aren't employed anymore. In this way, he isn't committing to a lower rent, and can wring more value from each apartment without running afoul of rental rules. But that only takes him so far. He's still got a long way to go. 

Another landlord decided that to play fast and loose. 

How did this landlord skirt the rules? He charged a "key fee" to people interested in renting a rent-stabilized apartment. So if a unit was $1500/month, he might charge $20,000-30,000 to someone who wants to rent it. In that way, he might offset his losing rent with a fee he can spread out over time to cover the loss. Is that legal? It seems so. You can read more about it here. Or maybe it isn't; you can read about a $250,000 fine imposed on another agent here.

Real Estate Commission is Next on the Docket

Recently, the NYC City Council passed another law, The FARE Act, which requires the hiring party (landlord or tenant) to pay the commission. So a landlord, if they hired an agent to show their apartment, will have to pay the brokerage commission.

Landlords have gotten very used to tenants paying the commission. It has been a unique feature of the New York City rental environment for much longer than I've been in business here. But soon, landlords will be coming out of pocket, or they'll have to find another way to source tenants than hiring real estate agents themselves. Will landlords put "showing agents" into rent-stabilized apartments so they have an "on site" agent to show the units? Will landlords create contracting businesses and bring in entire teams of employees and give them housing as a trade? I mean, I know one superintendent whose contracting business ended up being far more lucrative than the income he made as a super. So that's not farfetched.

But What's Going To Happen To Tenants?

Will rents go up to accommodate landlords paying commission to their agents? Or will landlords be forced to find new ways to market their units? Who is going to vet the prospective tenants? Every landlord I know finds this process cumbersome, between allowing access to the units, to running credit, to making sure there is no fraud. On the other side, who will protect tenants from unscrupulous landlords who just aren't great, if there are no real estate agents to vet the landlords? It is not going to be pretty. 

What I'm Already Seeing

What's happening now? I'm already seeing tenants who want to wait until "all rentals become 'no fee.'" Tenants of course want to avoid paying commission if they can. In my view, it's a slow-motion train wreck already in process. Limited inventory will serve to push up rents, while buyers may have to hire their own agents. I don't see any way that this ends well. Everyone is going to be frustrated. 

What do you think? -Scott & Magnetic