Powerful interests, including a real estate tech company and private equity firms, are contributing to soaring rents.
Renters filed a lawsuit this week alleging that a company that makes price-setting software for apartments and nine of the nation’s biggest property managers formed a cartel to artificially inflate rents in violation of federal law.
The lawsuit was filed days after ProPublica published an investigation raising concerns that the software, sold by Texas-based RealPage, is potentially pushing rent prices above competitive levels, facilitating price fixing or both.
The proposed class-action lawsuit was filed in U.S. District Court in San Diego.
In an email, a RealPage representative said that the company “strongly denies the allegations and will vigorously defend against the lawsuit.” She declined to comment further, saying the company does not comment on pending litigation.
The nine property managers named in the lawsuit did not respond immediately to a request for comment.
They included some of the nation’s largest landlords, such as Greystar, Lincoln Property Company, Equity Residential, Mid-America Apartment Communities and FPI Management — which together manage hundreds of thousands of apartments.
Four of the five renters named in the suit were Greystar tenants. A fifth rented from Security Properties. Their apartments were located in San Diego, San Francisco and two Washington state cities, Redmond and Everett.
The lawsuit accused the property managers and RealPage of forming “a cartel to artificially inflate the price of and artificially decrease the supply and output of multifamily residential real estate leases from competitive levels.”
RealPage’s software uses an algorithm to churn through a trove of data each night to suggest daily prices for available rental units. The software uses not only information about the apartment being priced and the property where it is located, but also private data on what nearby competitors are charging in rents. The software considers actual rents paid to those rivals — not just what they are advertising, the company told ProPublica.
ProPublica’s investigation found that the software’s design and reach have raised questions among experts about whether it is helping the country’s biggest landlords indirectly coordinate pricing — potentially in violation of federal law. In one neighborhood in downtown Seattle, ProPublica found, 70% of more than 9,000 apartments were controlled by just 10 property managers, who all used RealPage pricing software in at least some of their buildings.
RealPage told ProPublica that the company “uses aggregated market data from a variety of sources in a legally compliant manner.”
The company also said that landlords who use employees to manually set prices “typically” conduct phone surveys to check competitors’ rents, which the company says could result in anti-competitive behavior.
“RealPage’s revenue management solutions prioritize a property’s own internal supply/demand dynamics over external factors such as competitors’ rents,” a company statement said, “and therefore help eliminate the risk of collusion that could occur with manual pricing.”
The lawsuit said that RealPage’s software helps stagger lease renewals to artificially smooth out natural imbalances in supply and demand, which discourages landlords from undercutting pricing achieved by the cartel. Property managers “thus held vacant rental units unoccupied for periods of time (rejecting the historical adage to keep the ‘heads in the beds’) to ensure that, collectively, there is not one period in which the market faces an oversupply of residential real estate properties for lease, keeping prices higher,” it said. Such staggering helped the group avoid “a race to the bottom” on rents, the lawsuit said.
RealPage brags that clients — who agree to provide RealPage real-time access to sensitive and nonpublic data — experience “rental rate improvements, year over year, between 5% and 12% in every market,” the lawsuit said.
RealPage encourages property companies to have daily calls with a RealPage pricing adviser and discourages deviating from the rent price suggested by the software, the lawsuit said.
The lawsuit was filed by four law firms and a nonprofit, Justice Catalyst Law, dedicated to developing cases and legal strategies that advance economic and social justice. Gary Smith Jr., one of the lawyers involved, said the investigation into the case had been going on for more than a year.
“Today’s lawsuit plausibly alleges that Lessors of rental units have coordinated to drive rents up to unprecedented levels, exacerbating the nation’s affordable housing crisis,” Smith said in a media release.
RealPage counts some of the largest property managers in the country among its clients. Many favor cities where rent has been rising rapidly, according to a ProPublica analysis of five of the country’s top 10 property managers as of 2020. All five use RealPage pricing software in at least some buildings, and together they control thousands of apartments in metro areas such as Denver; Nashville, Tennessee; Atlanta and Seattle, where rents for a typical two-bedroom apartment rose 30% or more between 2014 and 2019.
Greystar and FPI Management each control hundreds of buildings in metro areas where rents have risen steeply in recent years. And Equity Residential, Lincoln Property Company and Mid-America Apartment Communities each manage dozens of buildings in high-growth markets.
RealPage’s clients may gravitate toward high rent-growth markets for several reasons. For instance, tenants in those areas will bear more rent hikes and so offer an opportunity to landlords to make more money.
But, RealPage says its software, formerly known as YieldStar, steers pricing that beats the market in areas where it operates.
“Find out how YieldStar can help you outperform the market 3% to 7%,” RealPage urges potential clients on its website.