In case you missed it, New York City’s City Council just passed a new rule that will impact the real estate market forever. They all but eliminated the dominant business model that has ruled the rental market for more than three decades: tenants paying brokerage commissions. I want to discuss all of the knock-on effects of this change, and what I foresee when it kicks into effect in mid-2025. You may want to make preparations.

Let Me Break This Down

When I began in real estate in 2003, I was a rental agent. It’s not the nicest part of the real estate market, to be sure. It is as transactional as real estate gets. A hustle. That said, as with every business I was in before real estate, there are still the good guys. And I knew them, agents who would tell you which landlords were good, which were awful, and which apartments were a value compared to others.

And to rent that apartment, you owed a commission of up to 15% of the annual rent, split between the tenant representative (if there was one) and the listing agent. That can be costly. Take a $5,000/month rental. The commission would often be $5000 x 12 months ($60,000) x 15% = $9000. Combine that will first month’s rent, and a month of security, and you’re at $19,000 before you even pay for moving fees. Never mind if a landlord also wanted you to pay last month’s rent, too (which was made illegal a few years ago, along with pet security deposits).

The Change, Explained

Starting in about six months, the only person who can pay a real estate agent commission to rent an apartment is the person who hired the agent who is showing the unit. If a landlord hires an agent to represent them, that agent cannot be paid by a tenant. And if a tenant hires a real estate agent to show them apartment, the landlord cannot pay their agent’s commission.

This seems rational. After all, this is how most markets function in the United States. The landlord pays their representative a fee to find, vet, and lock down a tenant.

But New York City is not every market. The reason that rental agents popped up in the first place is that landlords didn’t want to pay agents every time one of their apartments came available. They farmed out this cost to tenants. And given that vacancy is often less than 1%, it made for a more efficient market. Many landlords got higher-quality tenants without even hiring full-time, or one-off agents to represent them. They just told every real estate agency in town which units were available, and let the agents present applications. The result was also that the rental market did not usually bake-in the expense of paying out a real estate agent.

In down markets, though, landlords offered to pay real estate agents their commission, or some portion of it, to find tenants. They still did not always need full-time showings agents on their payroll, so this was still an efficient way of outsourcing their apartment leasing. And as soon as the rental market rebounded, they stopped paying agents directly.

This 2025 change will stop landlords from paying agents to source tenants. By eliminating that payment, it does two things: (1) It requires landlords to hire their own agents, or (2) It requires tenants to hire agents.

Where Does It Get Messy in Scenario One?

Many landlords don’t want to commit to one agency to source tenants for them. What if that agency does a poor job? What if they don’t do a good job of vetting the tenants? What if they want to pay less than these high fees? Which real estate agents will work for less? Will smaller landlords be able to compete? It’s a race to the bottom, with no way of incentivizing any other agents to show their apartments.

Worse, if they don’t want to pay an agent, how will other rental agents who are hired by tenants find out about the apartments? Will landlords be willing to pay to advertise their vacant units? Is that an expense they are willing to take on? Do landlords want to suddenly field a million calls, texts and emails from unvetted tenants? How will they vet tenants?

It seems that they end up almost by necessity hiring agents to represent them, and paying for it. What happens then? They raise their rents to factor that in. Landlords across the board raise their rents. And an already-tight rental market gets more expensive. Fast forward to your second year of a lease, and the new rent is based on the first year, which was inflated because of the baked-in commission payment.

Tenants end up likely paying more rent as a result. You could say that the market remains pretty efficient, but what then? If landlords realize that their returns could be much lower because of these new costs, will they sell these buildings or apartments? How many small-time landlords will exit the market? How will it impact rental availability? Rents will go up as inventory goes down further.

I’ll add one more thing: tenants who come directly. Those tenants who try to save money and go it alone don’t benefit at all, except if a landlord doesn’t have anyone representing them. And how will a tenant have any idea if the landlord is any good? Will a landlord rating system pop up to rank them? That would take time. And in the meantime, unlucky tenants who rented from a bad landlord will have a terrible experience.

Where Does It Get Messy in Scenario Two?

Okay, so the second scenario is just as likely. You plan to move into town and rent an apartment. You hire an agent. But what if they’re terrible? What if they aren’t getting it done? What if you want to work with multiple agents just to hedge your bets? How much paperwork will you need to complete as you go through this process?

And how many real estate agents will stick around as you try to do this on your own and cut them out while pretending to want to work with them. You’ll have signed paperwork again and again, binding you to agents as you see apartments. Many landlords will have hired agents themselves, so you’re not saving money on that side. It’s a mess where fewer and fewer rental agents will want to stick around. Not ideal when you have no idea where you want to be, and have little time to find a place.

The same goes for renters who already live in town. Who is going to alert you of good off-market opportunities, when there aren’t as many rental agents around? What has been an efficient, albeit expensive system, breaks down quickly.

Unintended Consequences

As with all legislation, there are good intentions, and then there are unintended consequences. Many agents, myself included, used rentals as a stepping stone to go into sales. Many actors supplemented their income by being rental agents. Landlords based their investments on there being a supply of young and hungry rental agents to run around. Tenants, too, while not happy paying rental commissions, understood that it was better to have a representative than not. All of this quickly falls apart.

While you may not be worried about it, it’s going to put a lot of real estate agents out of business. Not me nor my team, as rentals only represent about 3% of what we do. But it’s going to add costs that no one can foresee, and take a long time for price discovery to go back to normal, once these costs are baked into the rents.

Expect a messy time between now and then. -Scott & The HRT