The Latest Political Battle on Rents: Algorithms
In recent years, policymakers at all levels of government have pondered ways to provide rent relief to beleaguered tenants. Proposals have included various levels of price controls, modifications to municipal and state code requirements, and, in some cases, either the incentivization of new construction or the actual building of new units.
Yet a new battlefront has recently opened up in the war on rising rents: algorithms — specifically, software programs that are meant to optimally price rents on behalf of rental property owners and landlords based on existing data and predictive models. Policymakers from cities and towns across America all the way up to the U.S. Department of Justice have been weighing in. Do the concerns have merit, and what is the future of AI-modeling in pricing rents? Let’s dig in.
A Niche Technology Becomes More Prevalent
With the rise of data aggregation software and AI models that can quickly analyze and react to said data, algorithm-based pricing models have become commonplace in all manner of industries. Amazon, Walmart, and Target, for example, all use dynamic pricing based on demand, time-of-day, and what competitors are doing in real time. Airlines and hotels do the same, as do entertainment companies like Ticketmaster and ride-sharing apps like Uber.
With regard to real estate investors, savvy property owners have always had their thumbs on the pulse of their local markets, and to the extent possible, will move rents up or down based on what the market will allow. Over the last half decade, of course, those moves have almost always been up.
New tools have developed in recent years to make the process of pricing rents more data-driven. Consider the RealPage AI Revenue Management model, for example, which the company says will “consistently drive revenue outperformance across all properties, regardless of class, lifecycle phase, location, or strategy.” The model is essentially a tool that aggregates market data and offers recommendations or guidance to property owners on how to optimally price their rents. It does this by comparing rents that are either in its system, that it has acquired from partner data analytics firms, or that are publicly available for comparable properties and markets, oftentimes from units just down the street or a few blocks over from the units its users are trying to lease out.
I can say from where I sit, I have definitely seen the increasing use of models like these in the borrowers I have financed as a commercial lender. To be sure, there are other advantages of software programs besides just maximizing pricing (e.g. keeping lease information organized, tracking vacancies, etc.), but I think it would be fair to say optimal pricing has been both an initial motivation and a realized benefit by most, if not all, who have used these analytics-based tools. Similar programs are also available for short-term rentals including AirBNBs.
What’s the Problem?
A capitalist system typically rewards those who make the smartest decisions, so to some, especially the many real estate investors who have seen greater profits and improved margins due to predictive modeling on rents, there is no question of impropriety here.
But others are saying not so fast. In 2022, Heather Vogell, Haru Coryne, and Ryan Little of ProPublica pointed the finger at RealPage, comparing them to a “cartel” in raising rents through uncoordinated yet connected behavior by landlords, who are all sharing their data through the RealPage data aggregation tool, and then benefitting from the shared use of the dataset. They reported:
In one neighborhood in Seattle, ProPublica found, 70% of apartments were overseen by just 10 property managers, every single one of which used pricing software sold by RealPage.
To arrive at a recommended rent, the software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge.
For tenants, the system upends the practice of negotiating with apartment building staff. RealPage discourages bargaining with renters and has even recommended that landlords in some cases accept a lower occupancy rate in order to raise rents and make more money.
What the authors of the ProPublica piece and others point out is that certain goods and services are different; if the price of oranges or iPhones or maple syrup goes up by 6.5% due to the countless intertwining variables that impact the levers of supply and demand, people don’t generally notice or care all that much. But if the price of someone’s rent goes up by 6.5%, they will see it and feel it. Capitalist market principles don’t necessarily apply when the good or service being provided is something necessary for the basic function of daily living (e.g. housing), many would argue.
The Legal Issues at Play
Apart from the discussion of economic philosophy and capitalist theory, there are actual legal issues at play here. Various cities, towns, and states are starting to look into regulating such software on the grounds that it use represents price collusion and, with it, price gouging. Courts have weighed in on this subject many times, including perhaps most famously when the Supreme Court said in United States v. Trenton Potteries Co. in 1927 that any agreement among competitors to fix prices is illegal under the Sherman Antitrust Act, regardless of whether the prices set are reasonable. That is essentially what landlords are doing by comparing data with one another through these software programs, opponents argue.
Last year, the Department of Justice under President Biden sued RealPage, alleging the company was facilitating collusion among property-owners by enabling them to share non-public, sensitive information such as rental rates, occupancy levels, and lease terms with one another, effectively allowing them to coordinate pricing strategies to the detriment of consumers (i.e. tenants).
Cities and towns and some states have been similarly pursuing their own actions against RealPage and others in the industry, including the cities of Berkeley, San Francisco, Philadelphia, and Minneapolis, which have all banned the use of various forms algorithmic models in pricing rents. New York Governor Kathy Hochul has been discussing a proposal to do the same, while just this past week, New Jersey Attorney General Matthew Platkin filed a federal lawsuit against RealPage, alleging a coordinated scheme to inflate residential rents through illegal collusion. The lawsuit refers to the company as "a rent-setting cartel.”
How is RealPage reacting? Last June, the company issued a statement called “The Real Story,” denying any wrongdoing, saying:
Starting in October 2022, false and misleading claims about RealPage and its revenue management software have been reported to the media and in legal filings. These factual inaccuracies threaten to undermine the essential benefits RealPage’s solutions provide to both renters and housing providers. In fact, RealPage’s revenue management software contributes to a healthier and more efficient rental housing ecosystem.
Among the points made by RealPage is that their algorithms will sometimes recommend price reductions, and that all RealPage users ultimately set their own rents and are not being forced to institute the RealPage recommendations. RealPage also pointed the finger in other directions (accurately, in my opinion), saying the real cause of rising rents is not the rental software, but the chronic undersupply of housing units, inflationary pressures in the construction market, high mortgage rates that have pushed people into renting instead, and “inefficient or unnecessarily onerous permit and zoning requirements.”
What Comes Next
In January, the DOJ expanded the lawsuit by filing an amended complaint adding six major landlords as defendants: Greystar Real Estate Partners, Blackstone’s LivCor, Camden Property Trust, Cushman & Wakefield’s Pinnacle, Willow Bridge Property Company, and Cortland Management. Collectively, these companies manage over 1.3 million rental units across 43 states and Washington D.C. However, this amendment was done in January prior to Trump being inaugurated, so technically this happened at the tail end of the Biden Administration. As far as I can tell, the Trump Administration has not weighed in specifically on this topic yet, and I think it can be safely acknowledged their opinion of priorities is significantly different than that of the previous administration. I think it is likely that Trump and Musk, with a more permissive view of business practices particularly related to AI technology, are unlikely to pursue the current lawsuit with the same vigor as the DOJ might have done so under Biden.
For property owners and landlords using such software, I don’t think anything is going to change overnight, unless you happen to live in a community that is tackling such issues.
Ultimately, I think the RealPage reaction to the lawsuits was actually spot on with regard to the real reasons behind rising rents: namely, undersupply due to code restrictions (plus NIMBYism), tight banking going back to the aftermath of the Great Recession, and some of the unique characteristics of the moment including the rise of remote work and COVID-era migrations of people around the country. Policymakers griping with the technology should look towards their own policy options in order to incentivize new construction. But that being said, landlords and property owners who put rents on dial that can be turned up and down based on market conditions should also not be surprised when there is blowback from tenants and others looking for more stability and predictability in one of the major expenses of life.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
A failure to prioritise the supply of an essential good, plus nimbyism that tries to exclude developments that would cater for the disadvantaged, laws that reserve the act of building shelter to people regarded as qualified and a zoning system that invalidates most of the land that might otherwise be available is a recipe for societal failure. It impairs optimism, disincentives work and leads people to think that their agency as citizens is impaired. What sort of democracy would that be?