The U.S. Department of Justice and the attorneys general of eight states filed charges against real estate software company RealPage on August 23, accusing it of participating in an illegal operation aimed at driving up rents in cities across the United States. The company used “algorithmic pricing software” to allow landlords to coordinate their rents to the detriment of tenants, rather than competing with each other.
The civil lawsuit, filed in federal court for the Middle District of North Carolina, includes plaintiffs from North Carolina, Connecticut, Washington, California, Colorado, Minnesota, Oregon and Tennessee.
The lawsuit comes after a nearly two-year investigation by the Justice Department. Unnamed sources told Politico earlier this summer that regulators would take action to curb the alleged illegal behavior.
“Americans should not have to pay more rent just because a company found a new way to collude with landlords and break the law,” Attorney General Merrick B. Garland said in a statement. “We allege that RealPage’s pricing algorithm allows landlords to exchange confidential, competitively sensitive information and adjust their rents. Using software as an exchange mechanism does not exempt this system from (antitrust) liability.”
RealPage, which claims on its website to serve over 24 million rental units worldwide using property management software and data analytics, is currently facing lawsuits from various tenant groups making broadly the same allegations.
On X (formerly Twitter), Amy Klobuchar, the highest-ranking US Senator from Minnesota, wrote:
“When landlords collude to delegate pricing decisions to algorithms, tenants can lose the benefits of competition and face higher rents. I asked the Department of Justice to investigate RealPage’s use of algorithms to set rents, and now they’re taking action with a major antitrust case.”
Garland explained the allegations in detail during a press conference.
“Over a century ago, Congress passed the Sherman Antitrust Act to protect competition in the marketplace. When it was passed, an anti-competitive system might have looked like robber barons shaking hands in a secret meeting. Today, it looks like landlords using mathematical algorithms to adjust their rents. But antitrust law doesn’t become obsolete just because competitors find new ways to act together illegally,” he said.
RealPage argued that its services were carefully designed to comply with the law and that the company had cooperated with regulators. The company also promised to defend itself “vigorously” in court. The lawsuit was “meritless.”
“We are disappointed that after many years of investigation and cooperation on the antitrust issues surrounding RealPage, the Department of Justice is now bringing a lawsuit that seeks to scapegoat pro-competitive technology that has been used responsibly for years,” the company said.
The lawsuit comes in the heat of an election year in which housing construction is becoming more and more of a headline issue for both parties. Since rental costs have risen sharply in recent years (albeit with some signs of relaxation), the Biden administration’s lawsuit is an acknowledgment that people are paying attention to how and why the cost of keeping a roof over their heads has increased.
While most economists view the imbalance between supply and demand as the biggest factor driving up housing costs (both rents and purchase prices), the Justice Department alleges that RealPage explicitly sought to keep rents even higher by coordinating prices with tens of thousands of landlords.
“RealPage sells what it calls ‘revenue management’ software to landlords. We allege that this software is designed, marketed and sold to enable landlords to avoid the intense competition in the rental market,” Garland said. “Competing landlords agree to provide RealPage with their most sensitive, non-public information on a daily basis, including rental rates, lease terms and projected vacancy rates.”
“RealPage combines this data from competing landlords and feeds it into an algorithm that provides real-time price recommendations to competing landlords. But as we argue, these are more than just recommendations. RealPage actively monitors landlords’ compliance with these recommendations. It also monitors landlords’ other policies, for example, trying to prevent concessions that landlords use to attract or retain tenants.”
According to the Justice Department’s lawsuit, landlords are well aware of the goal and impact of these actions. The lawsuit repeatedly references a RealPage refrain used by executives and in marketing: “A rising tide lifts all ships.”
The lawsuit quotes Keith Oden, executive vice chairman of real estate investment firm Camden Property Trust – a RealPage client – as saying on a 2021 quarterly earnings call that he “welcomes” the presence of competing investors in his firm’s region, noting that “they all use revenue management.”
“They raised rents more than they should have,” Oden said. “The more quality competition we have in the market, the better we tend to do.”
The lawsuit also emphasizes that RealPage relies on nonpublic information and goes to great lengths to collect detailed data from various landlords, from floor plans to guest cards filled out by prospective renters. Landlords then leave pricing decisions to RealPage’s algorithms, all of which allegedly drive up rents higher than they would be in a competitive market.
“A large number of landlords effectively agree to outsource their pricing decisions to RealPage by using an ‘Automatic Acceptance’ setting that effectively allows RealPage to determine the price a tenant will pay. Landlords know what they are getting out of their agreement with RealPage. As one said, ‘I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and terms.’ This is classic price fixing,” Garland said.
“And RealPage knows what it’s doing, too,” he added. “In advertising its service to landlords, RealPage often says that ‘a rising tide lifts all ships.’ As a RealPage vice president explained, that phrase means that ‘it’s better for everyone to succeed than for you to basically try to compete against each other.’
“Under antitrust law, landlords – like all competitors – are not allowed to share their confidential, sensitive data with each other in a way that allows them to adjust the pricing of their product – in this case apartments – and thus cause tenants to pay more than they would in a competitive market.”
Garland also pointed out that about half of all renters spend a third of their income on rent – an amount the federal government considers “cost-burdening.”
Ironically, the astronomically high rents, regardless of how they came about, are potentially beneficial to real estate agents who want to help people buy and sell homes. Renters might decide to buy a home rather than continue paying excessive rents.
Anam Hargey, principal broker at @properties Christie’s International Real Estate in the Chicago area, adds: “Rents continue to rise every year, regardless of the economic situation. Maybe this will help people realize that buying is almost always the wiser financial decision.”
