First of Three Tailwinds for NYC Rent Growth
FARE Act
City Council member Chi Ossé galvanized support for his broker fee bill, and the City Council voted this week to approve the bill. Elsewhere, developers push the boundaries of the services and accommodations that accompany lease agreements in their buildings. Finally, investors, renters, and human beings are responding to mounting treasury yields and the tightening of abortion rules across the United States. The common thread between these different happenings is that they should contribute to higher rents in NYC.
I have written before about the benefits and reasons for believing in above-average rent growth in NYC. In the past year, I have discussed how the supply-demand imbalance and the inflationary effect contribute to rent growth in NYC for sustained periods. So many things make NYC a destination for tenants, operators, and capital alike, and today, I will begin a 3-part series where each week, I will focus on a tailwind that should propel rents upwards for time to come. Today, I will start with the FARE Act.
Ossé and other legislators designed the Fairness in Apartment Rental Expenses (FARE) Act, which I discussed here previously, to reduce the burden of large lump sum cash payments that renters needed to contribute at lease signing. As it stood, some tenants in NYC paid more at lease signings than they earned in a month's wages – and when we consider that 62% of Americans couldn't survive a month of expenses with their savings alone – things become challenging. The law tries to ease this burden by saying that only those tenants that want to pay the broker and explicitly hire the broker, will be required to pay. Since most tenants do not seek out brokers, the bill de facto reduces tenant upfront costs. Outside of those few instances when tenants hire brokers, landlords would now be required to pay fees in residential lease transactions involving brokers.
The landlord community has responded by saying this would result in rent increases, and that's exactly right. Landlords won't take the new bill sitting down and will increase rents more than they otherwise would. This policy should also encourage longer tenancies. To recoup a $6,000 broker fee, building owners will minimize vacancies in the future, raise rents, or a combination of both. $6,000 split into twelve monthly payments translates to a $500 increase in rent. Where that's not feasible, owners will require longer-term tenant stays to ensure the cost of the broker fee is paid back (hello, 2-year leases).
Winners:
Renters
By not paying as much upfront, tenants will have an easier time leaving apartments and moving into new ones. In language investors can understand- this is analogous to getting higher LTV loans. Less cash upfront means more deals because deals become "cheaper." But, higher LTV loans are more expensive because the interest rates and monthly payments are higher on amortizing mortgages. In rental terms, that means the rent goes up to cover the reduction in upfront cash required. This policy is great for short-term renters and encourages moving apartments when appropriate, creating liquidity in the rental market. On the other hand, renters who find their perfect home will probably see their long-term costs exceed that of their renting costs before the FARE Act.
Leasing Brokers
In the same way loan and sale transactions would increase if NY state lowered the mortgage recording tax rate, the number of leases signed per year should increase as renters' switching costs decrease. There is ample noise in the media, but at its core, this is what should happen. The market will get more liquid, there should be more apartment turnover, and rental brokers should collect more fees.
Third-party vendors
Companies that service tenants during move-ins: moving companies, home goods, and furniture companies will see sales increase.
Companies servicing landlords during move-ins: credit score companies and leasing attorneys will also see the demand for their services increase.
Data companies: More transactions mean more data and insights. Think Miller Samuel, Douglass Elliman, RealPage. Depending on how broker behavior responds to the new law, companies that charge fees for listing postings like StreetEasy may see more activity or less.
Losers:
Landlords (but only in the short term)
REBNY and other landlord groups lobbied in opposition to this bill, signaling that owners were not interested in paying broker fees and losing ~10% of a unit's rental income (assuming tenants vacated after a 1-year lease) in doing so. Adding broker fee expenses to rental income lowers cash flow and property value. But only if viewed in a vacuum. As I stated earlier, landlords can offset this new up-front charge. Though not all owners are more cash-liquid than their tenants, many are, which means less cash now is okay because it can mean more cash flow later. If landlords adjust correctly, this bill will redistribute when the tenant pays the broker fee, but it won't eliminate it. Landlords will take the broker fee and adjust the monthly rent to reflect higher costs. In an efficient market where investors consider the time value of money, this could even mean owners raise rents above the sum of broker fee + annual rent.
Rent stabilized landlords lose the most here because they are unable to raise their rents to compensate for not paying broker fees. But, many rent stabilized landlords also have no issues leasing their apartments because they are so coveted (in principle).
I'm curious to hear what property owners will do in response to Chi Ossé, and how this varies based on scale of operation. My prediction is that medium-sized property owners will get squeezed the most. Smaller owners will self-lease their apartments, owners with more scale will bring leasing staff in-house, and owners without scale required for in-house payroll but have too many units to self-lease could get pinched.
It will also be interesting to see how lenders adjust to this change. Will community banks/credit unions underwrite lower higher DSCR constraints because they believe cash flow will be reduced? Or will they take the position I have shared that cash flows will be readjusted with higher rents? And will local lenders who understand the bill respond more conservatively than national lenders, or will the inverse happen?
Rent Growth Test:
If it looks like a duck rent growth, swims like a duck rent growth, and quacks like a duck rent growth, then it probably is a duck rent growth.
I am bullish on NYC multifamily.
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Best Regards,
Romain Sinclair