It is becoming increasingly obvious that mega landlords across the country are (allegedly) colluding to jack up rents using centralized algorithms.
Last month, the Arizona attorney general joined the District of Columbia AG in filing a lawsuit against RealPage, which is accused of acting as an information-sharing middleman for real estate rental giants through its price-setting software. The North Carolina AG is also investigating RealPage, and the Colorado House of Representatives recently passed a bill targeting RealPage’s business model.
RealPage is facing several lawsuits contending that the property managers agreed to set prices through RealPage’s software, which also allowed the companies to share data on vacancy rates and prices in many of the US’ most expensive markets. Reporting, the lawsuits, and RealPage’s own statements showed that the company’s software said that it was often more profitable for mega landlords to have higher vacancy rates and keep rents elevated, which contradicted the old landlord practice of getting heads in beds even if that meant lowering rents.
The lawsuits against RealPage and the rental management companies contend that RealPage’s software covers at least 16 million units across the US, and private equity-owned property management companies are the most enthusiastic adopters of the RealPage technology. [1] RealPage itself is a private equity-owned venture. Many of the rental markets dominated by large landlords have seen astronomical growth in rental prices in recent years (even before the pandemic), as well as a rising number of evictions and spikes in homelessness.
Aside from the users of RealPage’s software, there was still a question of just how widespread the use of such tech was across the country. Another lawsuit against a similar company, Yardi Systems, and property managers using its software helps answer that question.
Included in the lawsuit against Yardi are the following property management companies (I’ve tried to track down just how many rental units these companies control, listed here):
- Alco Management Inc. Based in Memphis, Tenn. Manages more than 6,000 apartment homes in 9 states.
- Bridge Property Management. Manages more than 50,000 multifamily units across the country. Headquartered in Salt Lake City with affiliated offices in New York, San Francisco, and Orlando.
- Calibrate Property Management. “Based in Seattle, Washington, Calibrate is expanding its market reach. Now managing properties in Washington, Illinois, Arizona and Minnesota, Calibrate Property Management oversees approximately 1900 units and is rapidly growing.”
- Clear Property Management. Manages apartment communities across Texas. Total number unclear.
- Creekwood Property Corp. (Tonti Properties). Headquartered in Dallas and manages properties across Arizona, Colorado, Florida, Louisiana, North Carolina, and Texas. Total number unclear.
- Dalton Management. Manages more than 1,500 apartment units across California, Oregon, and Washington.
- HNN Associates. Manages roughly 7,000 units in the Seattle area, as well as others across Washington and Montana.
- Jones Lang Lasalle (JLL). A Fortune 500 company with annual revenue of $19.4 billion, operations in over 80 countries. Launched commercial real estate’s first AI-driven GPT model last year. JLL provides comprehensive real estate services in more than 4,000 buildings across the US and Canada.
- KRE Group. Founded by Jared Kushner’s uncle, it managed more than 20,000 multifamily apartments throughout thirteen states.
- LeFever Matson. Manages more than 3,000 units across California.
- Legacy Partners. Manages a portfolio of over 50 multifamily communities with more than 12,000 apartment homes
- Manco Abbott. As of 2005 (the most recent I could find), manages about 5,000 units in Central California.
- McWhinney Property Management. Based in Colorado with more than 4,000 apartment units completed or under construction.
- Morguard Corp. Manages nearly 18,000 units in the US and Canada, as well as 33.8 million square feet of commercial real estate.
- Pillar Properties. More than 2,000 units under management.
- Summit Management Services. More than 4,000 units across the country.
- Towne Properties. More than 15,000 units under management.
- Tribridge Residential. 6,000-plus units across Florida, Georgia, North Carolina, South Carolina, and Tennessee.
RealPage, Yardi, and the real estate management firms are currently attempting to have the lawsuits dismissed primarily based on two arguments:
- The defendants claim that the complaints must be dismissed because RealPage recommends, rather than mandates, certain prices.
- The defendants also argue that their conduct is not price fixing because “[c]ourts have little to no experience evaluating whether use of revenue management software is unlawful…”
The DOJ’s response: a defendant cannot “shield it[self] from the consequences” of organizing a price-fixing cartel merely because it organizes the cartel through disseminating a software program.
The Federal Trade Commission and DOJ just released a joint legal brief in a case involving Yardi Systems, in which they argue that price-fixing law applies even if an algorithm (or AI) told you to do it.:
Competitors’ jointly delegating key aspects of their decisionmaking to a common algorithm, because doing so “joins together separate decisionmakers” and thus “deprives the marketplace of independent centers of decisionmaking.”
….Under longstanding Supreme Court precedent, price-fixing agreements among actual or potential competitors are “all banned” whatever their form…unlawful price fixing includes not only competitors’ acting in concert to set the same price at which a product is bought or sold, but also competitors’ acting in concert to “rais[e], depress[], . . . peg[], or stabiliz[e] the price of a commodity.” This prohibition includes agreements to use the same pricing formula—analogous to agreements to use the same pricing algorithm.
The legal argument prohibiting such formations of cartels through algorithms seems pretty straightforward, as detailed by the SMU Science and Technology Law Review, which notes that the antitrust laws that govern this type of behavior have been around for more than 140 years, and while algorithms might increase the speed of price-fixing based on up-to-the-second data, they’re otherwise nothing new:
Let’s just change the terms of the hypothetical slightly to understand why. Everywhere the word “algorithm” appears, please just insert the words “a guy named Bob.” 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 straightforward reading of the law was complicated, however, by a Clinton-era loophole that allowed information sharing in the healthcare industry (purportedly to help lower prices, although the opposite of course happened).
The current DOJ made clear its stance on these questions last year when it closed those Clinton-era information-sharing loopholes. Principal Deputy Attorney General Doha Mekki explained the rationale behind the decision, saying that the development of technological tools such as data aggregation, machine learning, and pricing algorithms have increased the competitive value of historic information. In other words, it’s now (and has been for a number of years) way too easy for companies to use these safety zones to fix wages and prices. Here’s Mekki at an antitrust conference in Miami:
An overly formalistic approach to information exchange risks permitting – or even endorsing – frameworks that may lead to higher prices, suppressed wages, or stifled innovation. A softening of competition through tacit coordination, facilitated by information sharing, distorts free market competition in the process.
Notwithstanding the serious risks that are associated with unlawful information exchanges, some of the Division’s older guidance documents set out so-called “safety zones” for information exchanges – i.e. circumstances under which the Division would exercise its prosecutorial discretion not to challenge companies that exchanged competitively-sensitive information. The safety zones were written at a time when information was shared in manila envelopes and through fax machines. Today, data is shared, analyzed, and used in ways that would be unrecognizable decades ago. We must account for these changes as we consider how best to enforce the antitrust laws.
The FTC also just came out with a set of general guidance around algorithmic price setting. It’s titled “Price fixing by algorithm is still price fixing.” (Is there someway we could get the FTC to run Biden’s foreign policy too? And pandemic policy? And pretty much everything else.)
There could apparently be more legal questions/difficulty should AI be deployed in the place of simple algorithms (this is above my pay grade, but maybe some informed readers can comment), as detailed by VoxEU:
From the antitrust standpoint, the concern is that these autonomous pricing algorithms may independently discover that if they are to make the highest possible profit, they should avoid price wars. That is, they may learn to collude even if they have not been specifically instructed to do so, and even if they do not communicate with one another. This is a problem. First, ‘good performance’ from the sellers’ standpoint, i.e. high prices, is bad for consumers and for economic efficiency. Second, in most countries (including Europe and the US) such ‘tacit’ collusion, not relying on explicit intent and communication, is not currently treated as illegal, on the grounds that it is unlikely to occur among human agents and that, even if it did occur, it would be next to impossible to detect.
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Should the DOJ and FTC position on information-sharing software companies like RealPage and Yardi be confirmed by the courts, it would likely have an enormous impact across the country – and not only in the housing rental market. The use of such information-sharing algorithms have been detected across the economy, and there’s a decent chance it’s played a role in firms’ calculations to jack up prices. (As the Kansas City Fed noted, “markups could account for more than half of 2021 inflation.”)
Sticking to rental prices, the national average rent-to-income ratio reached 30 percent in the last year, according to Moody’s Analytics – the highest it’s been in the more than 20 years Moody’s has been tracking it.
The practices programmed into the renting algorithms also encourage more vacancies, more turnover, and more evictions.
How it’s supposed to work, or used to anyways, is that when occupancy dropped, rents would also drop so that properties would be full. Companies would compete for more “heads in beds” through lower rental prices and typically aim for occupancy rates around 97-98 percent. But the algorithm software allows property owners to keep prices high even during periods of high vacancy. The software required users (landlords) to maintain pricing at levels its algorithm set, which often meant higher vacancy, but landlords found that they were still making more money.
If we look at the explosion of homelessness alongside the widespread adoption of rent price-setting software, we begin to notice some similar trends beginning in 2016.
A 2022 study from The Guardian and the University of Washington found that across 73 US cities and counties there were at least 18,000 deaths of people experiencing homelessness over the 2016 to 2020 time period with the number increasing 77 percent over that five-year period. (The federal government makes no effort to count the number of homeless deaths, and many believe the number to be much higher.)
What was happening with rental pricing software over that time? From one of the lawsuits:
Beginning in approximately 2016, and potentially earlier, Lessors replaced their independent pricing and supply decisions with collusion. Lessors agreed to use a common third party that collected real-time pricing and supply levels, and then used that data to make unit-specific pricing and supply recommendations. Lessors also agreed to follow these recommendations, on the expectation that competing Lessors would do the same.
And more from ProPublica:
RealPage’s influence was burgeoning. [In 2017], the firm’s target market—multifamily buildings with five or more units—made up about 19 million of the nation’s 45 million rental units. A growing share of those buildings were owned by firms backed by Wall Street investors, who were among the most eager adopters of pricing software.
…Somewhere around 2016, according to one trade group, the industry’s use of the pricing software began to achieve “critical mass.”
It would appear backlash to these price-setting algorithms is now also achieving critical mass. .
Notes
[1] Here are some details I could track down of the real estate goliaths named in the lawsuits who were using RealPage software to allegedly collude and keep rents artificially high:
- Greystar: The nation’s largest property management firm with nearly 794,000 multifamily units and student beds under management. In December, it was nominated for six( count ‘em, six!) 2022 Private Equity Real Estate Awards. Roughly 100,000 student beds under management.
- Trammell Crow Company, headquartered in Dallas, is a subsidiary of CBRE Group, the world’s largest commercial real estate services and investment firm.
- Lincoln Property Co. Manages or leases over 403 million square feet across the US.
- FPI Management. Currently manages just over 155,000 units in 18 states.
- Avenue5 manages $22 billion in multifamily and single-family assets nationwide.
- Equity Residential, the 5th largest owner of apartments in the United States, primarily in Southern California, San Francisco, Washington, D.C., New York City, Boston, Seattle, Denver, Atlanta, Dallas/Ft. Worth, and Austin.
- Mid-America Apartment Communities, which as of June 30, 2022, owns or has ownership interest in 101,229 homes in 16 states throughout the Southeast, Southwest, and Mid-Atlantic regions.
- Essex Property Trust (62,000 units). This fully integrated real estate investment trust (REIT) acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets on the west coast.
- Thrive Community Management (18,700 units in Washington and Oregon).
- AvalonBay Communities, Inc. As of September 30, 2022, the Company owned or held a direct or indirect ownership interest in 293 apartment communities containing 88,405 apartment homes in 12 states and DC.
- Cushman & Wakefield, with a portfolio of 172,000 units.
- Security Properties portfolio reflects interests in 113 assets encompassing nearly 22,354 multifamily housing units.
- Cardinal Group Holdings, LLC. 89,000 units managed with more than 100,000 beds and a heavy presence in student housing.
- CA Ventures Global Services LLC. Manages more than 60,000 beds in 69 university markets.
- DP Preiss Co. Specializes in student housing and has more than 30,000 beds in 12 states.