Concerns about high apartment rents have been raging for some time now, with worries reaching a new zenith early last year. Realtor.com reported that the median rent in the nation’s 50 largest metro areas rose by an average of 17% for the year ending in February 2022. The Sun Belt saw the largest increases, with the Miami-Fort Lauderdale area of South Florida leading the way at more than 55%.
The reasons for these increases vary, with many blaming the low supply of homes for sale that is forcing families to rent. This certainly has played a role, with demand for apartments reaching a three-decade high in 2021, according to real estate marketing and analytics company RealPage.
There are some consumers, however, who believe rising rents aren’t just a result of supply and demand but are in part the result of technology. A growing number of apartment dwellers are banding together in class-action lawsuits, claiming that unlawful activities are exacerbating the situation.
If all these landlords follow the recommendation, then there won’t be alternatives to which renters can go, and the landlords will have market power.
– Douglas Ross, law professor, University of Washington
The focal point of these accusations is Texas-based RealPage and its rent software program, YieldStar Revenue Management. The program aggregates rental rates, local supply and demand, and other information to offer guidance on how much a landlord can charge for rents in a given community. RealPage claims that using the program can help landlords outperform competitors by 3% to 7%.
There were at least seven class-action suits filed against RealPage last year and more may be coming. The cases involve renters from New York to Seattle who generally allege the same crime — that landlords are conspiring together to eliminate competition and fix prices. The lawsuits claim the landlords are being helped by the Yieldstar software.
The Seattle case, for instance, accuses 10 major leasing companies of an unlawful agreement to artificially inflate the price of multifamily real estate in some of the city’s densest neighborhoods. According to a press release from Hagens Berman, a law firm representing the plaintiffs, “RealPage’s platform and algorithm provided an unprecedented method for lessors to track competitors’ rents and collude to respond to changing rates in real time, in lockstep.”
The law firm allegedly found that real estate companies that were RealPage software subscribers generally posted higher rents for downtown Seattle properties than companies that were nonsubscribers.
On its website, Hagens Berman offers a graphic that purports to show that rents for the 10 management companies mentioned in the lawsuit charged, on average, more for all types of rental units than other local companies. For instance, it claims that the area’s average three-bedroom apartment cost $3,674 in monthly rent, while the 10 defendants charged an average of $5,222 per month.
RealPage has publicly denied all of the allegations. There is no telling how these lawsuits will be resolved or whether they will have long-term implications for the multifamily housing industry. But they bring up compelling questions about how the real estate industry uses technology.
University of Washington law professor Douglas Ross, who began his career with the antitrust division at the U.S. Department of Justice, says there is no antitrust problem if a landlord simply uses a software program that includes existing data and new information inputted by the landlord, then makes recommendations to raise rents. “We don’t have the facts as determined in the course of litigation, but you can see a case for collusion if the landlords talked to each other and agreed on a price, or it could be the landlords never speak to each other, but the algorithm makes recommendations to each landlord for rents that would be above market. And none of this will work unless all the landlords follow the recommendations,” Ross says.
“Let’s imagine a situation where the algorithm knows everyone’s rent and advises a large group of landlords to offer the current rent, plus 5%. If all these landlords follow the recommendation, then there won’t be alternatives to which renters can go, and the landlords will have market power. That, by definition, means the ability to raise prices above a competitive level.”
So, would the smoking gun be that landlords must have met and discussed a way to make this happen? Not necessarily, Ross says. He maintains that there must be a mechanism to inform the landlords that they won’t have to worry about someone undercutting the rent. In this case, the algorithm must in some way seek to encourage the landlords into going along.
Ross offers a more straightforward case involving Apple, which in 2014 reached a class-action settlement with 33 state attorneys general over allegations that it conspired with five of the nation’s largest publishing companies to fix and raise the retail prices of e-books. Ross says Apple was the go-between among the publishers to fix prices.
“The attorneys are going to have to show that the use of this algorithm didn’t just lead to each landlord individually making decisions they would have made anyway with their understanding of the market. That won’t be good enough,” Ross says. “They are going to have to show there was an agreement among the landlords, either explicit or implicit, to use the rent recommendations by the algorithm, knowing that it would raise rents and profits.” ●