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Tenants filed a lawsuit this week alleging that a company that makes software for pricing apartments and nine of the country’s largest property managers formed a cartel to artificially inflate rents in violation of federal laws.
The lawsuit was filed days after ProPublica released an investigation raising concerns that the software sold by Texas-based RealPage might drive rental prices above competitive levels and facilitate price fixing, or both.
The proposed class action has been filed in US District Court in San Diego.
In an email, a RealPage representative said the company “strongly denies the allegations and will vigorously defend itself against the lawsuit.” She declined further comment, saying the company is not commenting on any pending litigation.
The nine property managers named in the lawsuit did not immediately respond to a request for comment.
These included some of the country’s largest landlords, such as Greystar, Lincoln Property Company, Equity Residential, Mid-America Apartment Communities and FPI Management, which collectively manage hundreds of thousands of apartments.
Four of the five tenants named in the lawsuit were Greystar tenants. A fifth was leased by Security Properties. Their homes were in San Diego, San Francisco, and two Washington state cities, Redmond and Everett.
The lawsuit alleges that the property managers and RealPage “carteled to artificially inflate the price and artificially reduce the supply and production of multifamily rentals from competitive levels.”
RealPage’s software uses an algorithm to sift through a trove of data nightly to suggest daily rates for available rental units. The software not only uses information about the apartment to be priced and the property in which it is located, but also private data about the rents of nearby competitors. The software takes into account the actual rents being paid to those competitors — not just what they’re advertising, the company told ProPublica.
ProPublica’s research found that the software’s design and reach have raised questions among experts about whether it helps the country’s largest rental companies indirectly coordinate pricing — potentially in violation of federal laws. ProPublica found that in one downtown Seattle neighborhood, 70% of the more than 9,000 apartments were controlled by just 10 property managers, all of whom used RealPage pricing software in at least some of their buildings.
RealPage told ProPublica that the company “uses aggregate market data from a variety of sources in a lawful manner.”
The company also said that landlords that use staff to manually set prices “typically” conduct telephone surveys to verify competitor rents, which the company said could lead to anti-competitive behavior.
“RealPage’s revenue management solutions prioritize a property’s own internal supply/demand dynamics over external factors such as competitor rents,” the company said in a statement, “therefore helping to eliminate the risk of collusion that could occur with manual pricing.”
The lawsuit alleges that RealPage’s software helps stagger lease renewals to artificially offset natural supply and demand imbalances, which deters landlords from undercutting prices achieved by the cartel. Property managers “thus kept vacant rental units unoccupied at times (and rejecting the historical adage of ‘keeping your heads in your beds’) to ensure overall that there is not a period when the market is faced with an oversupply of residential real estate for rent to keep prices higher,” it said. Such staggering helped the group avoid a “race to the bottom” on rents, the lawsuit says.
RealPage boasts that customers – who agree to provide RealPage with real-time access to sensitive and non-public data – experience “annual improvement in rental rates of between 5% and 12% in each market,” according to the lawsuit.
RealPage encourages real estate companies to have daily discussions with a RealPage pricing consultant and discourages deviating from the rental price suggested by the software, the lawsuit says.
The lawsuit was brought by four law firms and a nonprofit organization, Justice Catalyst Law, dedicated to developing cases and legal strategies that promote economic and social justice. Gary Smith Jr., one of the attorneys involved, said the investigation into the case had been ongoing for more than a year.
“Today’s lawsuit plausibly alleges that rental unit landlords coordinated to drive rents to unprecedented levels, exacerbating the country’s affordable housing crisis,” Smith said in a release.
RealPage counts some of the largest real estate managers in the country among its clients. According to a ProPublica analysis of five of the country’s top 10 property managers in 2020, many prefer cities where rents have risen rapidly. All five use RealPage pricing software in at least some buildings, and together they control thousands of apartments in metro areas like Denver; Nashville, Tennessee; Atlanta and Seattle, where rents for a typical two-bedroom apartment increased by 30% or more between 2014 and 2019.
Greystar and FPI Management each control hundreds of buildings in metropolitan areas where rents have risen sharply in recent years. And Equity Residential, Lincoln Property Company, and Mid-America Apartment Communities each manage dozens of buildings in high-growth markets.
Rent increases? A company’s algorithm could be the reason for this.
RealPage’s clients may be attracted to markets with high rental growth for a number of reasons. For example, tenants in these areas will bear more rent increases, giving landlords the opportunity to make more money.
But RealPage says its software, formerly known as YieldStar, drives pricing that beats the market in the areas it serves.
“Find out how YieldStar can help you outperform the market by 3% to 7%,” RealPage encourages potential customers on its website.
Haru Coryne and Ryan Little contributed to data analysis.