Antitrust Enforcers: "The Rent Is Too Damn High!"

The Antitrust Division finally sued RealPage for orchestrating a conspiracy among corporate landlords and illegally hiking rents for millions in cities across the country.

“I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and term. That’s classic price fixing." - unnamed landlord talking about RealPage, from the Antitrust Division’s complaint

In October of 2022, journalist Heather Vogell at ProPublica published a story on rising rent prices, which were spiking as the country opened back up after the Covid shutdowns. But Vogell’s investigative piece was not about Covid, it was how one algorithm of a single software firm - a private equity owned corporation called RealPage - was behind the increases. “I think it’s driving it, quite honestly,” she reported one executive of the corporation telling clients.

This slide is from a landlord's internal training presentation. Price-fixing clip art!

RealPage sells inventory management and pricing software to corporate landlords, who usually own tens of thousands of apartments, and need sophisticated data tools to manage and price them. “The nation’s largest property management firm,” wrote Vogell, “found that even in one downturn, its buildings using YieldStar ‘outperformed their markets by 4.8%,’ a significant premium above competitors.”

The story was explosive, explaining that, in fact, there was no mystery behind the inflation that Americans were experiencing, inflation in everyday items paired with skyrocketing corporate profits. There was a conspiracy, orchestrated by some of the richest men in the country. Median asking rents had spiked by as much as 18% in the spring of 2022, and that was outrageous. Moreover, rents are just out of control more broadly. As the Antitrust Division notes, "the percentage of income spent on rent for Americans without a college degree increased from 30% in 2000 to 42% in 2017."

Private antitrust lawyers filed multiple lawsuits, which were consolidated in Tennessee by 2023. Their argument “is that RealPage has been working with at least 21 large landlords and institutional investors, encompassing 70% of multi-family apartment buildings and 16 million units nationwide, to systematically push up rents.” As the architect of RealPage once explained, “[i]f you have idiots undervaluing, it costs the whole system.” The complaints showed that it’s more than just information sharing; RealPage has “pricing advisors” that monitor landlords and encourage them to accept suggested pricing, it works to get employees at landlord companies fired who try to move rents lower, and it even threatens to drop clients who don’t accept its high price recommendations. The suits have passed important legal hurdles and are going to trial.

Policymakers also responded. Seventeen members of Congress, and multiple Democratic Senators, such as Antitrust Subcommittee Chair Amy Klobuchar, asked government enforcers to look into the allegations. Senator Ron Wyden introduced Federal legislation to ban the use of RealPage to set rents, which the Kamala Harris Presidential campaign recently endorsed. At a local level, San Fransisco just prohibited collusive algorithmic rent-setting, and similar legislation is being considered in a bunch of states and cities.

Then government enforcers, who had been investigating, began unleashing lawsuits. It started at a state level. Arizona Attorney General Kris Mayes sued RealPage and corporate landlords, alleging that rent increases of 30% in just two years are a result of the conspiracy. Seven out of ten multifamily apartment units in Phoenix are run by landlords who use the software. D.C. Attorney General Brian Schwalbe sued as well, noting that “in the Washington-Arlington-Alexandria Metropolitan Area, over 90% of units in large buildings are priced using RealPage’s software.”

The FBI conducted a dawn raid of corporate landlord Cortland, a giant that rents out 85,000 units across thirteen states. Today, the Antitrust Division and eight states sued RealPage, alleging not just a price-fixing conspiracy to raise rents, but also monopolization in the market for commercial real estate management software. And while it’s a civil suit, in the press conference, the Antitrust Division chief Jonathan Kanter demurred on whether there might be pending criminal charges. The excitement was palpable; even the venerable Attorney General Merrick Garland got into it, saying at the press conference today that “the rent is too damn high!”

So what are the actual claims? And what does RealPage say in response? The new complaint against RealPage isn’t that different than those of Arizona, D.C., and private plaintiffs, though there is more useful detail and great quotes.

The gist of the complaint is that large landlords and RealPage work together to (1) share sensitive information and (2) raise rents and hold units off the market. This activity hits at least 4.8 million housing units under the direct control of landlords using RealPage software, and according to the corporation itself, its products cause rents to increase by between 2-7% more than they otherwise would, year over year. "Our tool,” said RealPage, “ensures that [landlords] are driving every possible opportunity to increase price even in the most downward trending or unexpected conditions.”

From the other side, corporate landlord customers are fans of RealPage. Said one unnamed landlord, “I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and term. That’s classic price fixing." When this source says “classic price fixing,” of course, he’s not confessing, he’s bragging. It’s important to note that RealPage isn’t raising rents everywhere, but mostly in cities with large landlords who can afford the software. (The listed metro areas include Anaheim, Atlanta, Austin, Baltimore, Birmingham, Boston, Charleston, Charlotte, Colorado Springs, Columbus, Dallas, Denver, Ft. Lauderdale, Fort Worth, Hartford, Houston, Jacksonville, Kansas City, Las Vegas, Memphis, Nashville, Orlando, Phoenix, Porltand, Raleigh, Reno, Richmond, San Antonio, San Deigo, Seattle, Tampa, Tucson, and Washington, DC.)

Part of the dynamic with this suit is about how algorithms and artificial intelligence have changed market structures across the economy. In 2023, Kanter’s deputy, Doha Mekki, freaked out the big law cartel with a speech on how certain information sharing practices, which have become commonplace, might now be illegal.

The realities of some markets – and the products and services that are core to them – challenge embedded assumptions about the susceptibility of those markets to concerted action among market participants of varying sizes and geographies. In some industries, high-speed, complex algorithms can ingest massive quantities of “stale,” “aggregated” data from buyers and sellers to glean insights about the strategies of a competitor. Where that happens the distinctions between past and current or aggregated versus disaggregated data may be eroded.

Where competitors adopt the same pricing algorithms, our concern is only heightened. Several studies have shown that these algorithms can lead to tacit or express collusion in the marketplace, potentially resulting in higher prices, or at a minimum, a softening of competition.

One novel element with the RealPage suit is that the Antitrust Division did more than just look through documents in their investigation, but actually had government technologists examining the code used to encourage certain pricing practices. And they found some super-sneaky practices. For instance, if there are a bunch of units that are likely going to be available in 12 months, RealPage will prioritize getting renters to sign 11 and 13 month leases, to prevent too many units from coming on the market at once and depressing prices.

But to be clear, RealPage is not just some super-savvy algorithmic coordinated pricing game. It was a straightforward conspiracy. For instance, If a property management employee wanted to hike rent, he could just click 'accept' on the RealPage software recommendation. If the the employee didn't, he had to deal with a bunch of administrative bullshit, like having to fill out a form with “specific business commentary” on why he wants to move the price lower.

This justification, RealPage instructs, should not be a mere preference for another price but must be based on a factor that the model cannot account for, such as local construction or renovations occurring in the building. It must be a "strong sound business minded approach."

If it’s not good enough, then the landlord employee will get hassled by RealPage consultants calling his boss.

The property manager knows that these recommendation rejections and accompanying justifications will be sent to a RealPage pricing advisor. If the pricing advisor disagrees with the rejection or justification, the disagreement is escalated for resolution to a landlord's regional manager, who typically supervises the property manager.

As the Antitrust Division put it, “RealPage trains pricing advisors to have an ‘accountability conversation’ or a ‘refresher on short term vs long term goals’ for clients that show less tolerance for increasing rents.”

All that said, it’s really easy in this age of AI hype to focus on algorithms, machine learning, and so forth. But to be clear, there was also a smoky back room, literally speaking.

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RealPage encouraged its landlord customers to do group meetings with one another where they exchanged pricing information and encouraged each other to raise rents.

And they were taking advantage of this collusion at the height of the Covid panic.

At an April 2020 YieldStar user group meeting, the participants discussed strategies for handling the COVID-19 pandemic. In the presentation, two RealPage employees and a landlord led a group discussion of trends in rent payments and collections and provided five strategic tips. One tip encouraged landlords to "push for occupancy but don't give away the farm (pricing)."

Another counseled landlords to "balance internal and external dynamics" and, referring to the nonpublic information used by YieldStar, to "use transactional market data for decision support and to know when you can be more aggressive" in pushing higher rents. Invited attendees included representatives from at least twelve landlords. At this meeting, Landlord 1 and another landlord shared information on their usage of payment plans with tenants…

RealPage began its agenda for an April 2021 YieldStar user group meeting with "strategic insights" from a RealPage economist. This employee shared "21 key strategic insights," including "focus on renewals," "be cautious with concessions," and "drive up revenues not just base rent." Specifically, he urged the group to "push up new and renewal pricing where demand (is) solid" and warned against over-relying on concessions. They were instead to "trust the science" of YieldStar.

In other words, the real story of AI policy is that it’s just an aid in price-fixing.

The DOJ did add an additional claim, which is that RealPage, aside from coordinating landlords, also screwed landlords by monopolizing commercial real estate management software. They bought their main rival in 2017, and because they have more data than anyone else, they were able to box out new entrants by, well, selling cartel services. “A presentation to RealPage’s board in 2022,” wrote the DOJ, “noted that ‘[RealPage] has gained [the] pole position in Revenue Management largely through the success of AI Revenue Management, which has become RealPage’s leading differentiating product.’”

Asked who their competitors were, RealPage employees would say they don’t really have any. One customer, after failing to get price concessions from RealPage, noted, “Here is the joy of a monopoly on a product category.”

Indeed.

So what is RealPage’s response? The corporation set up a website where it denied all wrongdoing. It made three arguments. First, sharing non-public information isn’t illegal. “Using nonpublic data to build, test, enhance, and train revenue management models does not violate antitrust laws because it is pro-competitive and ensures that recommended prices more accurately reflect current market conditions,” wrote RealPage, citing the case involving Rainmaker software that coordinated Las Vegas casino hotel rates.

Second, RealPage argues the DOJ already approved its business model. In 2017, when RealPage bought its main competitor, “the DOJ gathered extensive information about LRO and YieldStar and conducted numerous interviews with RealPage personnel, with full visibility into how RealPage's revenue management software operated.” It found no problems, and “RealPage's revenue management products are fundamentally the same today as they were when the DOJ reviewed them in 2017.”

Third, the claims are simply wrong. RealPage doesn’t force clients to accept its recommendations, it doesn’t force rent upwards, and it doesn’t share competitive data without anonymizing it. “The software,” RealPage wrote, “often recommends reductions before an owner would otherwise intuitively determine to lower its rents.” Of course, some of these rebuttals are done with wiggle room in the meaning. For instance, RealPage says it “focuses on internal data.” I’ve highlighted the word loosens the claim.

Many, though not all, of the counter-claims are similarly slippery. Still, this case is going to be about assigning blame for persistently high rents. And for that, RealPage fingered a “persistent undersupply of rental housing units,” inflation, overregulation, high mortgage rates, and “changes in where and how people choose to live.”

There’s also the politics. The firm has lobbied up, and is running an aggressive campaign to block public policy action, which is why there are only ten states who have acted, instead of dozens. RealPage is owned by Thoma Bravo, a savvy multi-billion dollar software-focused private equity firm, and it is represented by one of the top law firms in D.C., Gibson Dunn. It’s also an aggressive outfit; a colleague at my organization received a cease and desist letter from the corporation’s law firm, signed by former Obama Federal Trade Commission Deputy Director turned Gibson Dunn partner Stephen Weissman, the premise being that he presented information to the board of Supervisors in San Francisco that RealPage disagreed with. (Seriously read it, that’s the argument.)

Ultimately, suits like this are a fundamental challenge to the way we’ve been organizing our society for decades, and to the economics establishment, which insists that supply and demand are the only factors that matter, not market power. One part of Kamala Harris’ plan to bring down costs is to ban rent-setting by RealPage, which has galvanized the rank-and-file of the Democratic Party. And the mockery online is intense.

And yet, the pushback against these kinds of arguments by economists has been fierce, because suggesting power and middlemen have a role in pricing is to offend the religion of political and media elites. Just to pick a story at random, this article in CNN by David Goldman and Elisabeth Buchwald mocks the notion of “greedflation” as a driver of inflation.

Rents have also come down in recent months because of a glut in new rental housing. That’s led a growing number of landlords to offer perks like a month of free rent or free parking to get people to sign on the dotted line. Good ol’ supply and demand.

And of course, supply and demand do matter. But to believe that supply and demand are the only things that set pricing means you have to ignore what hundreds of investigators have found, the quotes from landlords and executives bragging about how they are inflating prices. Everyone knows ignoring power in the economy is absurd. And now we increasingly have the evidence to back up that instinct.

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cheers,

Matt Stoller