Senators Alarmed By Use of Rent-Setting Algorithm, Say It’s Helping Drive Inflation

By Conor Gallagher

Following an investigation into a Texas company’s housing rental pricing software, Senators Elizabeth Warren of Massachusetts, Bernie Sanders of Vermont, Tina Smith of Minnesota, and Edward J. Markey of Massachusetts earlier this month asked the Department of Justice to crack down.

While the pace of rent growth has slowed in recent months, the median asking rent is still up more than 20 percent than pre-pandemic, according to Realtor.com. The national average rent-to-income ratio reached 30 percent in the fourth quarter, according to Moody’s Analytics – the highest it’s been in the more than 20 years Moody’s has been tracking it. And according to ProPublica, in metro areas where RealPage clients (some of the larger property management companies in the country) control a sizable chunk of the rental market, rents were already skyrocketing well before the pandemic.

What role could the company RealPage and its Yieldstar software be playing in the rise? A big one, according to the senators. In their report sent to the DOJ, they describe how RealPage’s software uses an algorithm to help landlords push the highest possible rents on tenants. The tool is now used by some of the largest landlords in the country, including Greystar, the largest property management company in the US with more than 150,000 apartments. More from the senator’s report:

While RealPage did not provide us with all of the requested information that would have provided insight into YieldStar’s direct effects on rent levels, what they did share was alarming. Publicly available information from RealPage indicates that the software is used to help set prices for over four million units, which would be approximately 8% of all rental units, and appears to show that the company has access to “transactional apartment data from the rent rolls of 13+ million units.” Information provided by RealPage also revealed that the use of YieldStar has been most prevalent in some of the regions most heavily targeted by corporate buyers and with the highest rent increases.

RealPage’s response goes on to describe multiple instances where the algorithm facilitates and uses information sharing about rentals charged by other properties. For example, in describing the steps used by the YieldStar to recommend rents, the company indicates that:

If…it is determined that a supply/demand imbalance for that specific property is expected and thus that a [rental] price adjustment should be considered…the software uses aggregated, anonymized data from multiple sources about publicly available asking rents or actual, historically achieved rents at similar properties to help determine the price elasticity of demand…Based on this, the algorithm recommends the appropriate magnitude of any rent adjustment.

In its 14-page response to the senators, RealPage denied its software had a role in rising rents and attacked ProPublica’s reporting. The senators were not swayed.

The increased pricing control by these behemoth landlords goes hand in hand with the Wall Street takeover of the rental market that began in the aftermath of the financial crisis. As the report notes:

As institutional investors’ housing portfolios have grown, so too has their power to set rents as competition in certain housing markets dwindles. Following the financial crisis of 2008, the presence of intuitional investors, particularly in the single-family housing space, has grown steadily at about 3 percent each year since 2010. By buying up chunks of housing at prices that are often far lower than what is charged for traditional homebuyers, large institutional investors have amassed hundreds of thousands of homes. Furthermore, these homes have increasingly become consolidated within the hands of a few, large corporate actors.

Since a ProPublica investigation in October, more than two dozen federal lawsuits have been filed by renters alleging antitrust violations by RealPage and more than 40 mega-landlords in multiple states. That report also found that RealPage software would also lead to raising prices and not rushing to fill all vacant units. From ProPublica:

RealPage’s former CEO, Steve Winn, boasted on an earnings call in 2017 that one large property company found it could make greater profits by operating at a lower occupancy rate that “would have made management uncomfortable before.”

“Initially, it was very hard for executives to accept that they could operate at 94% or 96% and achieve a higher NOI by increasing rents,” Winn said on the call, referring to net operating income. The company “began utilizing RealPage to operate at 95%, while seeing revenue increases of 3% to 4%.”

A RealPage blog in 2018 also warned student housing landlords that if they weren’t using revenue management software, they could be “leaving money on the table” by being too quick to decrease rents.

The following is a list of some of the real estate goliaths named in the lawsuits who were using RealPage software to allegedly 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(!) 2022 Private Equity Real Estate Awards.
• 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).  Refers to its  employees as “thrivers.”
• 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.

The senator’s report goes on to note that in February the DOJ rescinded previously issued guidance on information sharing practices. This guidance provided a safe harbor to companies like RealPage. The senators say that carveout may have provided opportunities for “de facto collusion and price setting.”

The senators are referring to the DOJ’s recent closing of loopholes created by the Clinton administration to make healthcare more “available” and “affordable” to all Americans. The policy statements provided for antitrust “safety zones” which created circumstances under which the DOJ and the FTC would not challenge the following:

• Hospital mergers;
• Hospital joint ventures involving high-technology or other expensive medical equipment;
• Physicians’ provision of information to purchasers of health care services;
• Hospital participation in exchanges of price and cost information;
• Joint purchasing arrangements among health care providers;
• Physician network joint ventures.

Importantly, this guidance was applied to all industries – not just healthcare. The “exchange of price and cost” provision made it so even in non-concentrated industries, businesses could still wield monopoly pricing power by exchanging information with “competitors” through middlemen. Here was the loophole, according to the DOJ’s now-withdrawn enforcement policy:

Accordingly, in order to qualify for this safety zone, the collection of information to be provided to purchasers must satisfy the following conditions:

(1)  the collection is managed by a third party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);

(2)  although current fee-related information may be provide to purchasers, any information that is shared among or is available to the competing providers furnishing the data must be more than three months old; and

(3)  for any information that is available to the providers furnishing data, there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data may represent more than 25 percent on a weighted basis of that statistic, and any information disseminated must be sufficiently aggregated such that it would not allow recipients to identify the prices charged by any individual provider.

Thirty years later, the DOJ finally admitted that these loopholes were a mistake and closed them. Here is the Feb. 3 statement from the DOJ: 

After careful review and consideration, the division has determined that the withdrawal of the three statements is the best course of action for promoting competition and transparency. Over the past three decades since this guidance was first released, the healthcare landscape has changed significantly. As a result, the statements are overly permissive on certain subjects, such as information sharing, and no longer serve their intended purposes of providing encompassing guidance to the public on relevant healthcare competition issues in today’s environment. Withdrawal therefore best serves the interest of transparency with respect to the Antitrust Division’s enforcement policy in healthcare markets. Recent enforcement actions and competition advocacy in healthcare provide guidance to the public, and a case-by-case enforcement approach will allow the Division to better evaluate mergers and conduct in healthcare markets that may harm competition.

But it looks like the DOJ has a lot of work to do to get the information sharing under control if RealPage’s claims are to be believed. In the company’s response to the senators, it says its revenue management software is not unique to RealPage, or even to the housing market.