New York City's FARE Act: How This New Law Might Affect the Future Sales Market

The new law: On June 11, the Fairness in Apartment Rental Expense (FARE) Act passed last year by the New York City Council went into effect. Essentially, the law shifts the responsibility of paying broker fees from the tenant to the landlord or the property manager who hires the broker. If a landlord or management company hires a broker to list an apartment for rent, they must pay the broker fee, not the tenant. However, if the tenant hires a broker, they pay the fee. In short, the new legislation shifts the responsibility of the broker fee to the person who hires the agent to represent them.

Incidentally, from my experience selling and renting real estate in Manhattan and Brooklyn for over two decades, I'm well aware that renters haven't always paid broker commissions. The fee shifted from landlord to renter depending on the climate of the current market. There have been very tight rental markets with very low vacancy rates, and in those markets, the renter generally paid the fee, but not always. Paying agent's fees, plus giving renters incentives, have always been tools landlords used to lure renters into leasing in their buildings. Free gym memberships, free move-in fees, and discounted rents if the lessee signed for multiple years are all used to incentivize renters. In softer markets with higher vacancy rates, the term “no fee” apartments is used to signify to the renter that the landlord is paying the agent's commission.

So, the pendulum of the agent fee swings back and forth depending on the property, the landlord's need and market conditions. However, now, no matter the market conditions, the commission for renting is the responsibility of the person who hires the agent to represent them in the rental transaction.

Fall out: Immediately after the FARE went into effect, rents jumped by about $745 a month on average. Landlords and managing agents, who now have to pay at least one month's broker fee to the agent for leasing out their property, will simply amortize that cost into the existing rent, raising the rent to cover the broker fee.

The average rent in New York City between January 1 and June 10 was roughly $4,750 a month. From June 11 to about June 27, the average rent climbed to about $5,495 (+15.7%) a month. It's worth noting that rent prices do tend to peak in the summer months, and most recent data shows average rent declining slightly in some reports.

How might this affect the sales market? Under current market conditions, rents were already increasing before the FARE Act. Now, they might grow even faster because managing agents and landlords need to pay their brokers. This situation could definitely affect sale prices, particularly if mortgage rates start to drop and the monthly average rent increases.

One of my colleagues ran the numbers: She took an average one-bedroom apartment in Gramercy and a 20% down payment with an average HOA/common charges fee of $1,500 a month and an average sale price of $750,000. She calculated that the monthly cost would be about 10% less, on average, than the average rent for that neighborhood, which is currently $6,000 a month. It's an interesting argument; however, a fluctuating sale market and ever-increasing rental prices often change from week to week or month to month.

We saw this a few years back when interest rates climbed to 8% and even 9%. The immediate result in the sales market was that it was no longer cost-effective for buyers to put 20% to 25% down on a purchase and pay substantially more in monthly costs than a rental might be. Especially when holding their down payment in a stock portfolio would offset any losses they would incur from "wasting money" on rent. In that scenario, many New Yorkers found their personal economics dictating they should not purchase real estate back in 2022 and 2023. But, everything is cyclical, and the buyers that weren’t purchasing back then and rented instead put a strain on the overall rental market and caused rental prices to start to increase.

The FARE Act is going into effect in a tight rental market with less than 1% vacancy. Meanwhile, landlords are seemingly increasing rent prices to pay for the brokers representing their properties. This all adds up to an interesting few months ahead. Will rents continue to climb? Will previously reluctant buyers start to dip into the sale market for relief? No matter what the FARE Act fallout, we'll be watching this summer's real estate market with fascination!