CRE Mulls How Potential Rental Commission Ban Could Shake Up The Industry

Despite a temporary reprieve on a major change to how rental commissions are collected in the city, a chaotic two weeks has forced real estate brokers to consider how their businesses will be run in the future.

Earlier this month, state regulators caught the city by surprise, saying renters could no longer be charged a broker fee, unless they specifically hired a broker themselves. It is common practice in New York City for tenants to pay as much as 15% of the annual rent to a broker, even if that broker is representing the landlord.

Confusion — and fury — ensued, with many real estate professionals vowing to fight the change. Last Monday, a New York judge issued a temporary restraining order after industry members filed an Article 78 petition, meaning the status quo remains, for a few weeks at least. But despite the temporary freeze, real estate players are looking at how this possible change could reshape the multifamily market in the city.

Sources said smaller-scale landlords and brokers would be most affected if the new rule comes into force. While some said it is more evidence of the government’s anti-real estate sentiment, others suggested it could force landlords to adapt to new technologies and become more efficient.

“I think it splits the world into haves and have-nots and [landlords] who can afford to bear this and probably already have been and who can't,” said David Sigman, principal at developer LCOR, adding that he expects it to also put a “chill” on the investor market for Class-B multifamily product in the city.

“Changing it isn't just, you know, a wave of the pen. It really upsets the way the market has been structured for a long, long time," he said. "Small guys are going to get hurt.”

Right now, it is business as usual for the city’s brokers, landlords and renters, with the matter due back in court on March 13. In a joint statement last week, the Real Estate Board of New York President James Whelan and New York State Association of Realtors President Jennifer Stevenson said that they “looked forward to ultimately resolving this matter in court in the weeks ahead.”

The possible change, which was praised by tenant advocates, is just the latest in a shifting paradigm for the city’s real estate industry. Landlords, investors and brokers are continuing to adjust to the impacts of The Housing Stability and Tenant Protection Act of 2019, and many remain wary of what other changes could lie ahead.

As the potential broker commission shakeup was playing out, Mayor Bill de Blasio raised the idea of giving renters an alternative to security deposits, The Real Deal reported. Application fees have already been capped at $20 as a result of rent reform legislation, and there is widespread anxiety about a "good cause eviction bill."

“I don't really know what is in the mind of legislators, but I'm assuming they were seeking clarity around who is paying who … While I would applaud the clarity aspect of it, I think that like all things, change is better signaled in advance so people can adjust their business models accordingly,” B6 Real Estate Advisors CEO Paul Massey said of the possible change to commissions. "I think the real estate industry would like, broadly, some consideration for the fact that we generate half the city's revenue.”

Slate Property Group co-founder and principal David Schwartz agreed any major changes should be phased in rather than implemented “overnight.”

“The immediacy of it is the scarier part,” he told Bisnow. “[If the change goes ahead] it'll help the richer, more entrenched, more institutional brokers at the expense of the smaller individual and more mom-and-pop brokers.”

He predicts removing the renter-paid broker fees, should it happen, would mean fewer broker jobs, and landlords potentially exploring greater use of technology or apps to rent out apartments.

Certainly, there are already some seeing opportunity in the upheaval. John Fagan, the CEO of Doorkee, an online platform that allows landlords to list and tenants to show units and cut out brokers altogether, said he has already seen an uptick in interest from landlords since the New York Department of State signaled the change.

“The rental brokerage model is ludicrously antiquated, and it's not just outdated by the decade, it's really by the century,” he said, adding that he thinks the change will go ahead. He believes landlords will be forced to look at more efficient and speedy ways to rent out their apartments.

“We're really at the crest of a massive wave of PropTech adoption … I actually do think it's a gift,” he said.