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Landlords are using a popular software tool to jack up your rent

Apr 10, 2024, 20:18 IST
Business Insider
Big-time apartment owners have a secret weapon: a software that helps property managers to help them set rents and juice their profitsEmrah_Oztas/ Getty Image, eGreg Bajor/Getty Image, Aleksey Balatskiy/Getty Image, Cici Morosanu/500px/Getty Image, Busà Photography/Getty Image, Abanti Chowdhury/BI
Landlords have a lot of built-in leverage over renters. Moving is a pain, so tenants are more likely to accept rent hikes. Developing new apartments is expensive and time-consuming, which makes it tough for competitors to enter the market. Even during shaky periods for the economy, rents tend to hold steady or even climb — people still need to live somewhere.

Over the past few years, the playing field tilted further in favor of landlords. Rents soared thanks to a shortage of apartment units, remote workers' desire for more space, and a daunting for-sale market that kept many renters stuck in place.

Big-time apartment owners, it turns out, also had a secret weapon: a Texas company called RealPage, which sells software to property managers to help them set rents and juice their profits. Its algorithm tells landlords exactly how much rent they should charge for units in their buildings, based on a potent mix of both public and nonpublic data that property owners supply to the company.

RealPage openly brags about its ability to help clients "outpace the market in good times and bad." In a new lawsuit against the company, Kris Mayes, Arizona's attorney general, offered a translation: "'Outpace' is code for charging higher prices than what would be charged in a market untainted by collusion," the complaint reads. "This is price fixing, and it is illegal."

The lawsuit is one of dozens that accuse RealPage of operating a vast conspiracy to overcharge renters via its prized algorithm. Critics say the cooperation between RealPage and apartment managers has emboldened landlords to raise prices even if it means more units are left empty when tenants are forced to leave. Without RealPage, the plaintiffs argue, landlords would be hesitant to jack up rents; instead, they'd focus on keeping their buildings full.

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The cases offer a revealing glimpse at how corporate apartment owners rely on technology to wring every last dollar out of tenants, who often have little idea how their rents are calculated or why a double-digit annual percentage increase is justified. But a win for the plaintiffs is far from guaranteed. Without hard evidence of shady dealings in a smoke-filled backroom, they'll likely have to prove that use of the algorithm, and the cooperation it facilitated among apartment-owning competitors, unfairly pushed up prices and ultimately did more harm than good.

If the plaintiffs succeed, though, the ripple effects could extend well beyond rental housing. Algorithmic, or "dynamic," pricing is used in a wide variety of industries, including hospitality, retail, transportation, and entertainment. These cases could provide a road map for class-action lawyers to target those sectors, too. In short, the lawsuits that started with apartment rents could one day change how we pay for everything.

RealPage may not be a household name, but if you live in a major US city, you've probably walked past (or lived in) an apartment that had its rent price set by the software. Its clients, as of 2020, the last year data was publicly available, included the 10 largest multifamily property-management companies in the US. Its suite of services is used to manage more than 24 million units worldwide, according to the company's website.

RealPage wields the greatest power in markets with a high concentration of corporate-owned apartments. About 70% of apartment units in the Phoenix metropolitan area are owned or managed by companies that use RealPage for "revenue management," the company's term for the price-recommendation software that is now under scrutiny, according to estimates by Arizona's attorney general. In Tucson, about half of listed apartments fall under that umbrella. The Washington, DC, attorney general, who has also sued RealPage, said that more than 30% of multifamily units in the district, and 60% of units in buildings with 50 or more units, were priced using RealPage's software.

RealPage and its executives aren't shy about touting the benefits of its algorithm for landlords. A video on its website heralds the software, known simply as "AI Revenue Management," as the "first pricing-optimization tool to fully employ AI and machine learning," helping properties "exceed the market by 2% to 5%." In other words, the company's clients enjoy revenue increases from year to year that are greater than the market average. RealPage's algorithm is fueled by troves of granular data on real-time lease transactions, occupancy, and how many units are hitting the market, which landlords feed the company as a condition of using its services. It's unclear exactly how the company massages all those numbers to spit out its price recommendations, but RealPage says it aggregates and anonymizes the data from other apartment operators in the area and combines it with other public data and the property's internal rent data to arrive at a suggested dollar amount. It's "both common and expected" that apartment managers will follow the system's pricing recommendations on roughly 80% to 95% of their decisions, RealPage's website says.

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By turning over pricing to the algorithm, plaintiffs say, RealPage's clients are encouraged to push rents higher than if they'd left the decisions up to humans. You don't have to take their word for it, though — both the company and its users have publicly hailed the software's ability to capture more revenue. "As a property manager, very few of us would be willing to actually raise rents double digits within a single month by doing it manually," one RealPage executive said in a since deleted video, according to a 2022 investigation by ProPublica. Another apartment manager said in a testimonial video that the software "pushes you to go places that you wouldn't have gone if you weren't using it."

Rental prices have shot up by 29.4% since the beginning of the pandemic, averaging an annual increase of 7% over the past four years, Zillow found. Almost two-thirds of that increase happened in 2021 alone, the peak of the pandemic-era housing market. Of course, there were many factors driving up rents back then that had nothing to do with algorithms, most notably an increase in household formation — people broke up with their roommates, moved out of their parents' houses, or simply upgraded to more space — so it's hard to know exactly how much to ascribe to the algorithms. But information asymmetry is part of the bigger problem. Apartment owners have access to all kinds of market data through RealPage's algorithm, while tenants suffer from a lack of information — some can't even figure out who actually owns their apartment behind a web of LLCs. The plaintiffs allege that RealPage clients provide data to the company knowing that many of their competitors are doing the same and that they would all benefit by participating. In fact, the lawsuits claim that RealPage shares "peer lists" with clients that tell them exactly who else is providing data to the company within a specific distance of their property.

All kinds of other issues crop up when landlords rely on algorithms instead of human expertise, the plaintiffs say. At least when renters go back and forth with a real human on lease negotiations, there's a chance they could bargain the price down, Marie Claire Tran-Leung, the director of the Evictions Initiative Project at the National Housing Law Project, told me. An algorithm may not be so lenient.

"It really takes the tenant out of the equation altogether," Tran-Leung said.

In the 2009 movie "The Informant!," Matt Damon plays a bumbling white-collar worker who tips off the FBI that his company and its competitors are meeting to fix prices. The tale is based on a real-life case from the '90s that offered up a classic model of collusion, in which executives meet in secret and make handshake deals to screw over customers.

Algorithms aren't so straightforward. There are no smoky rooms, no opportunities for a wire-wearing whistleblower to catch the crooks red-handed. In a recent statement of interest in the lawsuits against RealPage, the Justice Department referred to algorithms as the "new frontier" of price fixing, arguing that they posed "an even greater anticompetitive threat" than anything that had come before. By sharing private information and surrendering their decision-making to the software, companies are engaging in price-fixing behavior, the department claimed. They don't even have to hold secret meetings; the algorithm does all the heavy lifting.

"Automating an anticompetitive scheme does not make it less anticompetitive," the department's statement said. In 2017, Maureen Ohlhausen, then a commissioner at the Federal Trade Commission, voiced similar concerns about pricing algorithms.

"Everywhere the word 'algorithm' appears, please just insert the words 'a guy named Bob,'" Ohlhausen said. "Is it OK for a guy named Bob to collect confidential price-strategy information from all the participants in a market, and then tell everybody how they should price? If it isn't OK for a guy named Bob to do it, then it probably isn't OK for an algorithm to do it, either."

This model of collusion is what experts call a "hub-and-spoke" conspiracy — the plaintiffs will argue that RealPage is at the center, or the hub, and the arrangements with each of its clients are the spokes. The problem for the plaintiffs is they also need to show that there's a rim to this wheel: an agreement between all the competitors to use the algorithm and pump up their profits. That rim is pretty important; without it, the plaintiffs' case gets a lot more difficult.

When CEOs get together and agree to push up prices, the mere act of doing so is illegal — it doesn't matter if they actually pull off the scheme. But with a rimless hub-and-spoke, the plaintiffs have to prove that each of the agreements between RealPage and its clients stifles competition and harms consumers. That's a much higher standard, Ed Rogers, a partner at the law firm Ballard Spahr who specializes in antitrust cases, told me. To avoid this, the plaintiffs will try to establish that a rim does, in fact, exist — that apartment managers either agreed with one another to use RealPage to collectively raise prices, or at least used its software knowing and expecting that their competitors would do the same and that they would all benefit by participating.

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It's possible to prove a conspiracy with circumstantial evidence, Jeffery Cross, a partner at the law firm Smith Gambrell Russell, told me. For example, a court might look at whether apartment owners had strong incentives to collude, whether they knew who else was participating, whether participation was enforced in some way, and whether they all took similar actions at the same time, like raising prices in unison. The judge could also consider whether the competitors knew that the price increases could succeed only if everyone did the same. But proving a rim this way is "much more difficult," Cross said.

RealPage didn't respond to requests for comment, but in a rebuttal to the Justice Department's statement of interest, the company said it may recommend price decreases and noted that apartment managers didn't always accept its suggestions. It also said there wasn't enough evidence to prove that the apartment managers had made a "conscious commitment" to engage in an unlawful scheme together. In short, no rim.

Of course, RealPage is far from the only reason that rents rose during the pandemic. And because a ton of new apartment buildings were completed in the past couple of years, rents around the country are stagnating or even dropping in some areas. But the plaintiffs in these cases still argue that the rental market would be better for tenants if RealPage didn't exist; if apartment owners couldn't lean on the algorithm, they might hold off on rent hikes or drop prices more frequently. They might also be more open to negotiating on lease renewals.

But we have a long way to go before knowing whether these changes will come to pass. The Justice Department has opened a criminal investigation into RealPage and some of its customers, Politico reported, adding to the mounting pressure on the company and its clients. The lawsuits filed by the Washington, DC, and Arizona attorneys general will work their way through their respective judicial systems, while the federal antitrust cases have been consolidated before a judge in Tennessee. The first of those cases was filed in 2022, so they're still in the early stages — it could be years before we even see a trial.

Whenever that day comes, it'll be worth watching. The RealPage cases are about far more than apartment rents. If the plaintiffs can successfully argue that property managers engaged in price fixing by using RealPage's algorithm, they could open the door for all kinds of industries to face similar scrutiny.

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Airlines, for instance, rely heavily on algorithms to price plane tickets, and experts have pointed out that the industry is especially susceptible to collusion because it is dominated by just a handful of major players. The Federal Trade Commission has accused Amazon of using a secret algorithm to see whether it could raise prices and prompt other businesses to follow suit. Just recently, the Justice Department and the FTC filed another statement of interest in a case that accuses casino-hotel operators of propping up prices by using a common algorithm. The platform in question is called Rainmaker.

James Rodriguez is a senior reporter on Business Insider's Discourse team.

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