Case for New York City Rental Broker-Fee Ban Falls Short

Before dismantling columnist Ross Barkan’s arguments for the broker-fee bill recently passed by the City Council, I will recognize his courage in opposing the industry’s position in a publication with a business audience.

Barkan, a former Democratic candidate, often expresses opinions that clash with those of his readers in Crain’s New York Business. I occasionally did the same when I penned masthead editorials for the publication, including one supporting a minimum wage increase.

If you’re going to do that, however, it’s best to have an airtight argument. Barkan’s “Good riddance to broker fees” had more leaks than the first Trump White House.

Starting with this:

“A tenant I know trying to rent an apartment for less than $2,000 in Brooklyn was told the broker fee would exceed $3,000,” he wrote. “With inventory low and demand exceedingly high, the broker can charge whatever the market might bear.”

Well, market prices. Kind of essential to capitalism.

When demand exceeds supply, prices rise and capitalists respond by increasing supply, which pushes prices down. In this case, they would build housing.

Unfortunately, the very same City Council has made housing development a costly and sometimes impossible task by maintaining low-density zoning in 90 percent of the city and occasionally rejecting projects that seek exceptions to build desperately needed units.

If you’re thinking, “Didn’t the Council just pass the City of Yes for Housing Opportunity, which will add 80,000 units?” Sorry, not impressed: That’s a 15-year total in a city of 8.6 million people. A 0.2 percent annual increase is not nothing, but it’s close.

Back to Barkan.

“The practice of forcing tenants to pay broker fees would be unthinkable in almost any other facet of the economy,” he claimed. “It’s the equivalent of a business hiring an outside consultant and compelling the consumer to somehow pay for the service.”

Kind of like an internet retailer asking you to pay UPS shipping costs? Or sports teams and concert venues asking you to pay Ticketmaster a fee?

Governments routinely tack on a 3 percent fee if you pay by credit card, or use fee-charging services to process electronic payments.

Unthinkable? Fairly common, actually.

Barkan then notes that homebuyers can go without a broker and negotiate a purchase themselves, but “in the city’s rental market, that choice is taken away.”

Not exactly. A number of large landlords, including LeFrak and the Ohebshalom family’s Sky Management, offer no-fee rentals. They bake the cost of broker services into the rent, which is exactly what all landlords will do when the new law takes effect.

Until now tenants have had a choice: apartments with no fees and higher rents, or fees and lower rents. With the new law, to use Barkan’s phrase, that choice is taken away.

New York and Boston are said to be the only U.S. cities where tenants usually pay broker fees. Not coincidentally, those are two of the nation’s tightest housing markets.

The right way to make fees go away is to increase the vacancy rate so it’s easier to find an apartment. But liberals won’t do that because vacancy over 5 percent would end rent stabilization, and conservatives won’t do it because their constituents don’t want more neighbors (note the City of Yes carveouts’ for Staten Island and parts of Queens, Brooklyn and the Bronx).

Council member Chi Ossé’s newly passed legislation, which says whoever hires a broker must pay the broker’s fee, has benefits and drawbacks:

It will make brokers more accountable to landlords by making it clear whose interests brokers represent. Perhaps brokers will become more active in screening out problematic tenants.

Tenants will pay higher rents but have lower move-in costs, and brokers' incomes will drop because landlords will negotiate for lower fees than tenants pay now.

Brokers will no longer be able to charge high fees for super-cheap rent-stabilized apartments, whose owners will suffer the most because they can’t raise rents to offset broker fees. They can only hope the Rent Guidelines Board does that.

Barkan is a talented columnist but failed to explore these angles because he was writing from the perspective of only tenants, not of economists and certainly not of the real estate world. When it comes to delivering hard truths about real estate and politics to the business community, courage is necessary but not sufficient.