RealPage’s legal woes grow by the day. By now, everyone in commercial real estate is familiar with the cases against the Richardson, Texas-based property management software company. A 2022 ProPublica expose unleashed a wave of class-action lawsuits and federal investigations alleging RealPage created a price-fixing cartel that kept housing prices in many U.S. markets artificially inflated.
Senators Elizabeth Warren, Bernie Sanders, and other lawmakers released a public letter to RealPage in 2022, claiming the company’s revenue management software was “facilitating a never-ending race to setting the highest possible rents.” The U.S. Department of Justice filed a statement of interest in the class-action suit against RealPage and 34 co-defendant landlords, arguing the complaints adequately allege Sherman Antitrust Act violations.
In November 2023, Washington, D.C.’s attorney general filed a similar complaint against RealPage, and 14 landlords that collectively manage about 50,000 multifamily units in D.C. Arizona’s attorney general wasn’t far behind, announcing a lawsuit against the embattled firm in February and nine major residential multifamily landlords operating in Arizona.
North Carolina’s attorney general is the latest AG to put RealPage in a state’s crosshairs, announcing an investigation in early March as part of a broader effort to protect homeowners and renters in North Carolina. “Housing is already too expensive for so many North Carolinians,” said North Carolina Attorney General Josh Stein. “Companies cannot collude to illegally raise rents on tenants. My investigation into RealPage will shed light on whether this company’s operations violate the law and raise rental costs for residents.” Whether you think the cases against RealPage are strong or not, the company and its co-defendants are facing the wrath of the legal system.
The rise of dynamic pricing
The cases against RealPage center on the company’s YieldStar product, one of its three essential revenue management tools. The software mines a vast trove of data to balance prices, lease lengths, and occupancy rates to help property managers optimize their portfolio’s revenue. YieldStar uses anonymized data to recommend pricing for about 4.5 million U.S. housing units. RealPage says the software can help landlords increase revenues between two and seven percent.
The rapid pace of rent growth since 2020 hasn’t helped RealPage in the court of public opinion. Many local governments imposed rent freezes during 2020 due to the pandemic, but rental prices rebounded swiftly in 2021 and 2022 after pent-up demand. The average U.S. rent increased 18 percent in 2021, five times faster than during the first year of the pandemic. Rental prices have moderated since then, with the average price expected to increase about 3.9 percent this year in the top 100 U.S. markets. However, the shock of those increases hit Americans hard, especially with consumer price inflation hitting brutal highs in other areas.
RealPage has vigorously defended itself in the array of lawsuits it faces. The company says its landlord customers aren’t required to take its rental price suggestions. The YieldStar software also often recommends rent reductions. RealPage has noted that rent prices are decided by many factors, including supply and demand and each landlord’s circumstances. America’s affordable housing shortage is also to blame for rising rental costs, and RealPage notes multifamily occupancy has been at an all-time high.
A RealPage spokesperson said the antitrust case the company faces in Arizona is “based on a fundamental misunderstanding of how revenue management software works.” Therein could lie the main issue. Revenue management software is ubiquitous in the business world today, often going by other names like surge pricing, dynamic pricing, and algorithmic pricing. Many consumers don’t understand how it works or even that it exists. The practice has become a prominent target for regulators nationwide.
Dynamic pricing has always existed to some extent. Hotels and airlines charge more during the busiest times of the year, and electricity is more expensive in the summer when more people use air conditioning. In the past, most of this was based on seasonal patterns and historical data. The difference now is that the algorithms used in dynamic pricing are more sophisticated than ever. Weather data can be collected anytime, and some algorithms can factor in customer volume in real-time rather than historically.
These algorithms are being used increasingly by several industries. Grocery stores like Kroger and retailers like Walmart have introduced electronic shelf labels in some stores that allow more rapid price shifts that fluctuate up and down. Rideshare apps like Uber and Lyft use surge pricing that adjusts fares based on busy times and other factors. Digital menus at restaurants have made price changes more frequent and easier for restaurants. Restaurants can also frequently change prices on apps like DoorDash.
E-commerce has used dynamic pricing for a while. Amazon automates prices based on vast amounts of real-time data on consumer behavior, supply, demand, and competitor offerings. Even the fast-food chain Wendy’s recently announced plans for dynamic pricing on its hamburgers and french fries. The swift public backlash may stop them from doing it, but it shows how deeply ingrained pricing by the algorithm has become throughout the economy.
Algorithmic pricing may not be inherently illegal, but Americans have been more sensitive to it during a time of stubborn inflation. Savvy shoppers can ‘game’ the system by knowing when prices are lowest, but not everyone does this. The idea that competitors are sharing sensitive pricing data and keeping prices artificially high is where allegations of price-fixing come in. For RealPage, the charges carry more weight than those of other firms. An expensive hamburger is less of a concern than expensive housing costs.
Collusion by an algorithm?
The lawsuits against RealPage will test whether decades-old antitrust laws can govern price-fixing cases that involve algorithms rather than industry insiders fixing prices in the smoke-filled backrooms of old. The test could be challenging for the plaintiffs. In court filings, RealPage says the landlords never entered into a ‘horizontal agreement’ as a violation of the Sherman Antitrust Act. In other words, there was never any conscious commitment by the landlords to 100 percent comply with the rental price recommendations as opposed to simply agreeing to use the YieldStar software. Historically, collusion for price-fixing took the form of handshake deals between rival firms. In RealPage’s case, the plaintiffs must prove the company’s algorithm had replaced the hand-shake deals and was a more effective way to collude.
The outcome of RealPage’s lawsuits could set precedents that affect how other antitrust cases involving algorithmic pricing are decided. Lawmakers and federal agencies have signaled that addressing algorithmic pricing is a priority. Two bills have been introduced in the Senate to close ‘loopholes’ in antitrust law that don’t consider algorithmic pricing powered by AI. Senator Amy Klobuchar (D-Minn.) introduced the Preventing Algorithmic Collusion Act, and Senator Ron Wyden (D-Ore.) introduced a bill specifically for the residential real estate industry. Klobuchar’s bill would ban firms from using sensitive information from their competitors to train a pricing algorithm, and it would create a presumption of illegal collusion if companies did so.
The Federal Trade Commission and the Department of Justice have taken a hardline stance against algorithmic pricing. On March 1st, the agencies filed a joint legal brief that specifically mentioned residential real estate and said, “Price fixing through an algorithm is still price fixing.” The FTC notes the housing industry isn’t alone in using “potentially illegal collusive algorithms.” The DOJ has secured a guilty plea on using these algorithms to fix online resales prices, and an ongoing case involving the sharing of price-related data is being tried against meat processing competitors. Other private cases have been brought against hotels and casinos.
The various cases against RealPage and its co-defendants will take a while to litigate. There has been some movement, with two co-defendants in the massive class-action lawsuit agreeing to settle out of court. For now, RealPage is fighting the charges. The class-action lawsuits were consolidated in a Tennessee court, where a judge recently rejected RealPage’s motion to dismiss the lawsuit.
In the court of public opinion, many have concluded that RealPage is already guilty. That’s likely because so many renters are furious about the rent hikes of the past few years. President Biden’s mention of the case during his State of the Union address further shows that lawmakers are focused on winning public favor by addressing it. The trope of the ‘evil landlords’ has combined with AI and tech companies to create a perfect scapegoat in the eyes of many, which may go a long way during an election year.
The cases against RealPage haven’t been proven in a court of law yet, though, and it may be challenging to establish AI-facilitated collusion with decades-old antitrust statutes. Lawmakers have shown a willingness to amend antitrust laws to meet new forms of collusion, but anything in today’s divisive Capitol Hill faces long odds of passage. What’s clear is that the fight against algorithmic pricing goes well beyond RealPage. The implications of RealPage’s lawsuits will be immense for the future of antitrust law. The real estate industry may be at the center of the fight over algorithmic pricing, but they are far from the only sector facing scrutiny.
Read more: RealPage’s Legal Woes Are Part of a Bigger Battle Over Algorithmic Pricing.