Industry insiders refute RealPage Rental Cartel claims

AI has been blamed for job cuts, terrible art, and plagiarism. But a report by industry researchers says claims that algorithms illegally raised rents cannot be true.

In October, ProPublica reported that RealPage was driving up apartment rents across the country. Lawsuits followed, alleging that the software — which suggests rents to landlords by forecasting availability and demand — essentially created a consortium of multifamily operators. The Ministry of Justice opened an investigation.

Now, a group of industry insiders, two of whom were quoted in the ProPublica article, are pushing back.

Revenue management software pioneers Jeffrey Roper and Donald Davidoff — both currently CEOs of software companies specializing in the multifamily commercial real estate sector — joined industry consultant Dom Beveridge in a report debunking the nonprofit news site’s story.

“It’s not just that incorrect That there is a multi-family cartel of any kind, it is not maybe“, write the authors.

In the ProPublica article, Davidoff and Roper — who served as chief scientist at RealPage from 2004 to 2012 — discuss the history of revenue management software. But they claim the story dismissed their explanations for how the technology works, and they now want to set the record straight.

Airlines, hoteliers, car rental companies and railway operators have used revenue management software since the 1980s. Apartment owners have used it since at least the 1990s, but the article has sparked new outrage among renters and regulators.

They worry that when the technology is applied to apartments, it allows landlords to share rental information and raise rents above normal levels, fueling the country’s affordability crisis.

Several property managers told ProPublica that the program led them to seek higher prices than they would have gotten without it. In the aftermath, at least one class action lawsuit was filed against Richardson, Texas-based RealPage.

The new report claims that the program is designed to encourage competition, not suppress it, and that these claims “provide an unhelpful distraction from the more pressing issue of housing affordability.”

In a statement, RealPage noted that it played no role in the white paper and that “we applaud the comprehensive work it represents and hope it will be a catalyst for similar constructive analysis and discussion that will refute the many inaccuracies and distorted narratives about our industry.”

A ProPublica spokesperson said the outlet stands by its reporting.

Unified offer

The appeal begins by examining how the cartel emerged and whether the multifamily market can sustain it. The product offering, in this case rentals, must be standardized among a relatively small number of competitors who have common financial goals and a way to coordinate pricing decisions.

ProPublica looked at Belltown, a trendy Seattle neighborhood with just over 9,000 market-rate apartments. The publication found that 70 percent of the apartments are managed by 10 management companies.

“There’s something like ‘The Emperor Has No Clothes’ about reading that statistic,” Beveridge said. “Think about grocery stores, car dealerships, or any other type of local service. Can you think of anywhere where 70 percent of the supply comes from more than 10 different businesses?

In one Belltown building that uses RealPage’s YieldStar revenue management software, rents have increased 42 percent since 2012, compared with 33 percent in similar buildings downtown, ProPublica reported. (ProPublica did not disclose whether any of those buildings used YieldStar.)

Studying Belltown as a distinct market for apartments does not accurately reflect how renters search for apartments, Beveridge said.

“You’re not just looking at the same block,” he said. “You’re probably looking at several different neighborhoods that are quite far apart from each other when you’re thinking about moving.”

Nationally, ProPublica found some consolidation: The share of U.S. apartments controlled by the 50 largest property management companies has been growing annually over the past 14 years. By 2021, they oversaw about 4.2 million units.

The response attacked that argument by pointing out that the country’s largest apartment owners — as opposed to managers — have seen their market share decline 17 percent in a decade to about 2.4 million units. Meanwhile, top real estate managers increased their stake by 58 percent.

ProPublica described the managers as most relevant to the case.

“Our reporting focused on property managers — not property owners — because managers are the ones using revenue software to price apartments, and they have actually become more standardized over time,” a ProPublica spokesperson said. “Rents simply encounter fewer apartment operators when looking for a place to live in some urban markets.”

A former antitrust prosecutor told ProPublica that RealPage’s online forum and invitation-only meetings “could raise an antitrust red flag.”

However, the appeal makes clear that multifamily companies, which control about 20% of the apartment market, are too fragmented to be considered a cartel.

It is also noted that financial goals differ between rental properties. Some landlords need to fill apartments quickly, even if it means lowering rents. Others have time to wait.

“There is absolutely no scenario where someone’s price is going up all the time,” Beveridge said. “The idea that there is some revenue management causality that causes prices to go up is completely untrue.”

A new project in the leasing phase needs cash flow and activity, so owners aim to land tenants quickly, even if that means offering concessions. On the other hand, a value-add venture may be more willing to wait for higher-paying tenants to show investors that the renovations have delivered returns.

If owners and operators have different goals and reasons for appeal, they should have different definitions of the ideal price.

The authors focus on “exposure,” or the amount of units that are vacant or soon to become vacant.

“Competitors within the same submarket typically face different levels of exposure at a given time,” the authors write. “Because exposure varies so much, it doesn’t make sense for competing properties to follow the same pricing strategies.”

With all the trade-offs and conflicting variables that govern pricing dynamics, no revenue management software can create a single pricing system, the authors write.

An opportunity for coordination

The question being decided in court and at the Justice Department is whether owners and operators who use the same software, which analyzes data from other buildings when suggesting rates, form a cartel.

It is not clear that using the program means that realtors consented to price gouging. In the face of lawsuits, lawyers will also note that landlords shared pricing information long before algorithms existed.

Ultimately, the report’s authors call for more housing construction and scoff at the idea that landlords should charge less than renters are willing to pay.

“It is tempting to blame landlords for housing affordability,” they write. “But it is fundamentally disingenuous to suggest that the solution to a deep structural issue like housing affordability is to demand greater altruism from investors.”