What is behind the steep increase in rental prices? | The Excerpt
Across the country, Americans are struggling to keep up with the rising cost of rent. Rental prices have gone up roughly 35% during the last five years, according to the real estate service firm Zillow. Recently, the Justice Department and attorneys general from eight states filed a lawsuit against a software company that helps landlords manage 16 million rental units nationwide. That company is called RealPage. According to the lawsuit, RealPage has shared data about rental properties that has led property owners to collude rather than compete in the rental market. Sandeep Vaheesan, legal director at the Open Markets Institute, joins us on The Excerpt to discuss RealPage and the recent antitrust lawsuit filed against them.
Hit play on the player below to hear the podcast and follow along with the transcript beneath it. This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text.
Dana Taylor:
Hello, and welcome to The Excerpt. I'm Dana Taylor. Today is Thursday, October 24th, 2024, and this is a special episode of The Excerpt.
Across the country, Americans are struggling to keep up with the rising cost of rent. Rental prices have gone up roughly 35% during the last five years according to the real estate service firm, Zillow. Recently, the Justice Department and Attorneys General from eight states filed a lawsuit against a software company that helps landlords manage 16 million rental units nationwide. That company is called RealPage. According to the lawsuit, RealPage has shared data about rental properties that has led property owners to collude rather than compete in the rental market. Here to discuss RealPage and the antitrust lawsuit against them is Sandeep Vaheesan, Legal Director at the Open Markets Institute.
Thanks for joining me, Sandeep.
Sandeep Vaheesan:
Thanks for having me, Dana.
Dana Taylor:
How does the RealPage software work? How does it determine rental prices?
Sandeep Vaheesan:
So, RealPage works with landlords across the country in most metropolitan areas. They collect unit-specific data from landlords; so things like number of bedrooms, square footage, and of course the overall occupancy rate of the building. They compile all this data and use it to figure out how landlords can collectively maximize the revenues. They bill themselves as a revenue management service. So they take all this data together and provide pricing recommendations to all their clients, and as you said, their clients collectively control millions of apartment units across the United States.
Dana Taylor:
What happens when RealPage users try to override a recommendation? Are landlords able to bypass recommendations and then set their own prices?
Sandeep Vaheesan:
So, RealPage recommendations are fairly close to binding. There is, in principle, a way for landlords to reject a RealPage recommendation and independently set rents, but RealPage makes it very difficult. So typically, an employee of a property manager must seek approval from his or her supervisor before they can override, and even when they request an override, RealPage can say no. And in general, RealPage expects a high level of compliance from its clients.
So lawsuits filed earlier by the Attorneys General of Washington, DC and Arizona found that RealPage is willing to terminate clients who too often override its pricing recommendations. And as a way of ensuring that clients are complying, RealPage actually sends out people called secret shoppers to pose as prospective tenants and determine whether landlords are actually complying with the rents recommended by RealPage. So there's a fairly elaborate enforcement system that RealPage has instituted and maintained over the years.
Dana Taylor:
Sandeep, how does using the RealPage price-setting algorithm differ from comparing comps on traditional sites like Realtor and Zillow to determine rental prices?
Sandeep Vaheesan:
So the RealPage software really does two things. It consolidates a great deal of very granular information so it can offer more precise pricing recommendations than simply looking on a public website can. And second, I think this is critical for legal purposes. What RealPage does is it consolidates all this information and in effect acts as a collective price-setting agent for all these landlords. Rather than these landlords individually setting rents based on their own profit and loss considerations, what RealPage does is it looks across the entire market, for example, a metropolitan area, collects data from, in many cases, a majority of landlords, and says these are what the profit-maximizing rents are for the entire landlord collective.
So RealPage and its clients use the term "a rising tide lifts all boats." So what they're really trying to do is boost the collective revenues and profits of landlords, and that comes at the expense of tenants and prospective tenants looking for an affordable place to live.
Dana Taylor:
In announcing the suit, Attorney General Merrick Garland said, quote, "Americans should not have to pay more in rent because a company has found a new way to scheme with landlords to break the law." Is the antitrust lawsuit against RealPage about the legality of the algorithm, or is it about the way the data generated is being used?
Sandeep Vaheesan:
Yeah. I think the algorithm is a secondary part of the lawsuit. What's really critical for antitrust purposes is this joining of forces. This is good old-fashioned collusion, you could even call it a cartel, where a group of rival landlords come together guided by RealPage and say, "Instead of competing against each other to attract tenants, we're going to set rents jointly. We're going to boost our revenues and profits by working together in concert." So it's that collective action that really matters.
The algorithmic aspect is interesting in that RealPage is putting very powerful computers and software and a massive volume of data to do collusion in a very sophisticated and precise manner. But that shouldn't blind us to the basics of the case, which is the joining of forces among rivals. It's more sophisticated than competing executives getting together in a smoke-filled room and setting rents, but the practical implications and the legal consequences are and should be the same.
Dana Taylor:
How difficult is it to prove that competitors are colluding to fix rental prices? Do prices have to increase in tandem, or does there have to be a pattern of increases across a certain number of properties?
Sandeep Vaheesan:
What really matters for antitrust purposes is that coming together of rivals. So in this case, the rivals are not directly working together, rather they're working through RealPage. RealPage is acting in effect as an agent for competing landlords. So that makes the case a little bit more tricky for the government and other antitrust enforcers. But I think there are a number of very helpful facts for them in these cases.
So first, RealPage, when it tries to recruit landlords, signals to them that their competitors are already on board. So landlord C might look at RealPage marketing materials and realize, "Oh, landlords A and B are already working with RealPage. So it seems like RealPage is trying to get all of us to work together." So there's this sort of indirect coordination at work. Landlords are, for the most part, not talking directly, but in a sense talking through RealPage. So I think that's a very helpful fact for the government. Second, the government can point to significant rent increases over the past 10 years since the widespread adoption of RealPage's software tools. That's another very helpful fact.
And third, this was something that was most pronounced and visible in the suits filed by Arizona and the District of Columbia, RealPage actually helped instigate a change in pricing strategy. Traditionally, landlords try for maximum occupancy. They want every unit to be filled and collecting revenue for them. An empty unit entails cost. They still have to maintain the unit without making any money, so they try for maximum occupancy. What RealPage did was they persuaded landlords to change their strategy. They said, "Instead of this 'heads and beds approach,' if you have a lower occupancy level with a higher level of rent, you'll actually make more money in the long-term." So that change in strategy was noticeable and has been documented statistically, and I think that'll be another very helpful fact to the government in prosecuting RealPage.
Dana Taylor:
How has RealPage responded to this lawsuit? Are they defending the design of their algorithm and the way it's being used by property owners?
Sandeep Vaheesan:
They've defended themselves through multiple ways. So first, they've said that they are just helping individual landlords price their units in a more rational way. They say that the rent recommendations are not binding, that there's really no collusion going on, that they're working with landlords on an individual basis. There is no joining of forces, as the government alleges. So they're defending the mechanics of their program, their relationship with landlords, saying that we're just offering recommendations; in a sense, functioning like an outside consultant. They've also pointed to broader features of the housing market. They've said that there are restrictions on new construction, and that they're not contributing to higher housing prices, rather we have a deeper supply problem going on.
And so they've tried to both minimize their involvement in what's happening and deflect and point to larger structural forces in the housing market to say that 'we did nothing wrong,' and to the extent the United States has a housing crisis, 'don't look at us.'
Dana Taylor:
The lawsuit quoted a landlord who described the RealPage software, saying, "I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rent and term. That's classic price-fixing." Are landlords who are using RealPage to set rates also legally on the hook here?
Sandeep Vaheesan:
They can be. The federal lawsuit that was filed last month is targeting only RealPage, but the lawsuits filed by Arizona and the District of Columbia have named individual landlords as well. So they are likely to face legal consequences because they are part and parcel of this broader conspiracy.
Dana Taylor:
Can you give me a clear-cut example of illegal price fixing?
Sandeep Vaheesan:
A classic example would be two gas stations across the street from each other. Owner A goes to owner B and says, "We could make a lot more money if we combine forces. Why are we trying to capture business from each other?" And so they enter an agreement saying, "From now on, we are going to charge at least $4 a gallon for gasoline." So that's an example of classic price-fixing. Especially if there is documented written communication, that would be a very easy case to prove. And RealPage is effectively doing that on a very large scale using sophisticated computers and with RealPage facilitating communication between otherwise competing landlords.
Dana Taylor:
In a world of AI-powered algorithms, are existing antitrust laws sufficient to protect consumers? And if not, what types of reforms are needed?
Sandeep Vaheesan:
I believe the existing antitrust laws are more than adequate to prevent and stop such conduct going forward. The algorithmic aspect is interesting. It makes what's happening seem more high-tech and cutting-edge. But that shouldn't blind us to the basic reality, which is it's the joining of competing forces that matters for antitrust purposes. Whether prices are fixed through a spreadsheet, jotted down on a napkin, or determined by high-powered computers, that is almost immaterial. It's the concerted action. It's the collective action by competing landlords that matter. So I think our antitrust laws are more than up to the task of stopping firms like RealPage from enabling collusion.
Dana Taylor:
As I mentioned at the top, Americans are struggling to find affordable housing. Setting the legalities aside, what's been the impact of RealPage on renters?
Sandeep Vaheesan:
So, RealPage appears to be one of several contributing factors to higher rents. So I mentioned that three lawsuits have been filed by public authorities, one by the DOJ and two by Arizona and the District of Columbia. There's also been several class action lawsuits filed on behalf of tenants against RealPage, and those class action lawsuits allege that RealPage, since 2016, has contributed to double-digit rent increases. In some markets, they find that rents have gone up as much as 80% since RealPage software was widely adopted. Which is not to say that RealPage is the sole cause of that rent increase, but there has been a dramatic spike since RealPage went big among landlords.
Dana Taylor:
I was going to ask, other than waiting for the outcome of this case, are there currently any remedies available for anyone who's seen their rent skyrocket over the past few years?
Sandeep Vaheesan:
So if you're a tenant living in a large apartment complex, there is a good chance that your landlord was pricing your unit using RealPage software. In which case, entirely unbeknownst to you, or likely unbeknownst to you, you may be part of a class action lawsuit against RealPage. Those lawsuits are still in the fairly early stages, so you're unlikely to receive a check in the mail or a rent credit anytime soon, but there's a good chance you're actually part of a collective legal action against RealPage.
Dana Taylor:
Sandeep, thank you so much for being on The Excerpt.
Sandeep Vaheesan:
It's been my pleasure. Thanks so much, Dana.
Dana Taylor:
Thanks to our senior producers, Shannon Rae Green and Kaely Monahan for their production assistance. Our executive producer is Laura Beatty. Let us know what you think of this episode by sending a note to podcasts@usatoday.com. Thanks for listening. I'm Dana Taylor. Taylor Wilson will be back tomorrow morning with another episode of The Excerpt.