At the end of January, New York’s Department of State issued guidance that, pending likely litigation, will force landlords to pay rental broker fees. Many New Yorkers celebrate the symbolic strike against what they perceive as an exploitative institution—the sketchy broker. But moving the payment to the landlord’s side doesn’t eliminate the cost of finding, matching, showing units, and vetting tenants—the cost will still be paid, and you will still meet the occasional “sketchy” broker.
The legal incidence of a fee—whose wallet it comes from—doesn’t matter much; economic incidence is determined by the relative bargaining power of buyer and seller. (“Bargaining power” in this case is the ratio of the elasticity of demand to the elasticity of supply). Since the broker fee rule doesn’t change the supply or demand for market-rate units, the fee should be expected to fully pass through for market-rate renters.
One intuitive way to see that superficial fee incidence doesn’t matter much is the wide array of “no-fee” apartments you find on rental sites like Streeteasy. Cash-poor renters will find no-fee apartments more attractive. But this is just a story about marketing decisions by landlords; some market-rate landlords already pay the fee, some don’t. Whether you come out ahead in a no-fee or fee apartment depends on how long you stay in it. The longer you stay, the more it may make sense to pay the broker a fee instead of the landlord.
But New York’s stabilized and controlled rental units by definition don’t have flexible prices. So, while market-rate landlords won’t take any new hit from this rule, price-controlled landlords are in a pickle. They will have to eat the fee and can’t raise rents to offset it. It’s one more strike against the net operating income of their buildings, which is why the owners and operators of rent regulated buildings are fighting the new rule.
What could government do to reduce the actual cost of tenant matching, regardless of who has to pay the fee upfront? One way would be to reduce the barriers to obtaining a real estate salesperson or broker license—and expanding reciprocity for other states’ real estate licenses and doubling the license renewal period from 2 years to 4 years would be a start. State government could also jawbone New York’s fragmented real estate industry into finally agreeing to a normal, open, digital multiple listings service, as is typical in most other US cities. A centralized multiple listings service resembling those of any normal, functional US city would undeniably reduce search frictions for renters—there’s no reason why digitally viewing all public listings should be so difficult in this city, and the persistent absence of a New York MLS only serves the interests of brokerage firms who profit from the fragmented system.
This new rule is mostly symbolic for market-rate renters and landlords, but another strike against the incomes of rent-stabilized and controlled buildings. The rule changes who signs the check but does not actually reduce the cost to society of matching tenants and apartments. More productive energy would focus on actually reducing these searching and matching costs, instead of merely shuffling the deck of who pays.
Alex Armlovich is a fellow at the Manhattan Institute. Follow him on Twitter here.
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