Since its founding in 1998, RealPage has grown into a formidable real estate data analytics and software company. It was acquired in 2020 by private equity firm Thomas Bravo and was valued at approximately $10.2 billion. RealPage then acquired its largest competitor in 2017, Lease Rent Options, for $300 million. The company made other acquisitions that year, including the apartment market data provider Axiometrics and On-Site Manager, Inc., a leasing and marketing platform firm. Overall, RealPage has acquired 10 companies since 2016, enabling it to super-power its software with increasing streams of data and create a larger market share for the platform.
RealPage’s story is one of PropTech’s successes. Company executives often bragged about the firm’s influence in the multifamily industry during the high times of its rapid growth. The company has led several summits where some of the country’s largest corporate landlords mingled. One such summit is their annual RealWorld conference, where executives from companies like Cushman & Wakefield, Greystar, and Lincoln Property Co. served on subcommittees.
One of RealPage’s most popular software offerings has been YieldStar, a revenue management service that provides rental pricing data and suggests prices to landlords based on varying factors. During a 2017 earnings call, then-CEO Steve Winn boasted that a property company managing more than 40,000 apartment units once discovered it could make more money by operating at a lower occupancy level. Winn said this “would have made management uncomfortable before” if not for the insights gleaned from YieldStar.
This software is now part of the assorted allegations in the legal quagmire RealPage finds itself in. RealPage has drawn the attention of antitrust regulators, and several class-action lawsuits have been filed against it since a ProPublica exposé was published in October. RealPage has been vocally proud of YieldStar’s effectiveness in driving rent increases in the past. One of the lawsuits alleges there is a marketing video where a RealPage executive takes credit for the spike in rental prices in recent years. It’s also alleged that Jeffrey Roper, the architect of YieldStar, stated the software was designed to sidestep agents who had “way too much empathy” and were hesitant to push rents higher. Now that the legal dogfight has begun, the company will be much more careful about what it says.
With lawsuits filed against it from all corners of the country and more probably on the way, RealPage is facing serious legal trouble. By most accounts, its YieldStar software has been wildly successful, but maybe it was too successful. Depending on how the various courts rule, the ruthless effectiveness of YieldStar in maximizing multifamily revenues may have actually been illegal.
What’s inside the black box?
RealPage has denied the allegations, and few people in the multifamily industry seem willing to talk to me about them. The company faces at least seven class-action lawsuits that have been filed since October 18th, along with separate scrutiny from the Department of Justice and Federal Trade Commission. Some of the biggest names in multifamily real estate have also been implicated in the lawsuits, including Greystar, Lincoln Property Co., and Trammell Crow. One case filed in New York demands $5 million in damages and claims RealPage’s clients control 19 million of America’s overall 48.5 million rental units.
The crux of the suits is simple enough to understand: all the defendants are accused of colluding to artificially raise rents with the help of YieldStar. One complaint states YieldStar enabled landlords to set and keep rents artificially high and defy the fundamental dynamics of supply and demand. The lawsuits allege anti-competitiveness and violations of Section 1 of the Sherman Antitrust Act. One case also alleges violations of the Cartwright Act, which is essentially the California state version of the Sherman Act. The complaints say YieldStar shared otherwise private data between landlord clients and encouraged them to fix prices that eliminated competition in some rental markets. One lawsuit alleges sharing private, real-time rental pricing and supply data was a condition of using YieldStar.
The ProPublica report examined five of the nation’s top 10 property managers as of 2020, and all of them used YieldStar in at least some buildings. Collectively, they controlled thousands of apartments in metro areas like Nashville, Seattle, Atlanta, and Denver. Rents in those markets for a standard two-bedroom apartment increased by 30 percent or more between 2014 and 2019. ProPublica revealed that in one neighborhood in Seattle, 10 property managers oversaw 70 percent of all apartments, and they all used YieldStar. Multifamily managers can reject the pricing suggestions that YieldStar offers, but former RealPage employees allege that as many as 90 percent of suggestions are adopted.
These allegations are damning but must, of course, be proven in court. The price-fixing was the biggest draw of YieldStar, according to many of the class-action complaints. A confidential witness in one of the complaints said he’d call the competition in the area, usually with a list of 10 people to contact. He’d ask what they were charging for rent, then change his prices on YieldStar. “It was price-fixing,” the witness said. “What else can you call it when you’re literally calling your competition and changing your rate based on what they say?”
According to the lawsuits, RealPage’s conferences were also places where landlords allegedly agreed on prices, often set by RealPage itself. An online User Group Forum had thousands of members that exchanged rental data and collaborated on setting prices. Exchanges of information between competitors, especially pricing information, are inherently suspect according to antitrust laws. When competitors set prices jointly instead of individually, they commit what’s known in legal terms as a “supreme evil of antitrust.” Whether price-fixing is done through online software or in a smoky room makes no difference.
Jonathan L. Rubin, a partner at MorginRubin LLP, said that many antitrust cases like this are lost because most business people know better than to leave a documented trail of collusion, so it can often be hard to prove. The Sherman Act has been around since 1890, and companies are wise to it. But RealPage executives’ enthusiasm for YieldStar in public statements in the past could be used against them. The fact that there are documented instances of landlords sharing price data on RealPage’s online User Forum may also not look good in court.
Another subtle issue in the cases against RealPage is the theory that third-party software could orchestrate collusion. “When a platform like this makes the rules, is that tantamount to an agreement of joint profit maximization?” Rubin asked. Complaints are still being filed against RealPage, and there will undoubtedly be appeals. These cases will take a while to litigate. Rubin told me not everything has been revealed about how YieldStar works and how collusion could’ve been achieved. As the cases are litigated, more details will come to light about what’s inside the black box that powers YieldStar.
If RealPage loses, the legal remedies would be monetary damages and injunctive relief. Damages can be hard to calculate in antitrust cases because courts need to estimate how much money was made or lost. In other words, how much money did the affected renters lose, and how much did landlords make because of YieldStar? However, the more important aspect in the case would be if there was injunctive relief, which would require RealPage to stop the business model of the YieldStar software or, at the very least, the types of data that are shared. The anti-trust lawsuits against RealPage could have chilling effects and make some landlords stop using YieldStar in fear of retaliation (many of them were named in the lawsuits as well). But most users of the software are probably thrilled at how it has helped them. “They’ll probably continue using it because it works so well,” Rubin told me.
It’s all about that algorithm
One of the most interesting aspects of the lawsuits is that they center not on a group of people willingly colluding on a price but on an algorithm. Problems with algorithmic pricing are well-known, and the first case involving price-setting software goes back to the 1980s. Most major U.S. airlines began sharing non-public pricing information back then, and between 1988 and 1992, the arrangements are reported to have cost consumers more than $1 billion. Eight airlines reached settlements or consent decrees with the feds by 1994, and they agreed to change what data was shared.
In 2017, the Department of Justice and the Federal Trade Commission released a white paper about algorithms and collusion. It cited the airlines’ case, but it wasn’t specific to any industry, and it rings eerily similar to the allegations against RealPage. The authors state that algorithmic pricing may sometimes help consumers, but it often leads to competitors unlawfully colluding through an intermediary to restrict output and fix prices.
What’s troubling for consumers is that humans are replaced with algorithms in pricing goods and services, removing empathy from transactions. RealPage’s YieldStar offers “suggestions” for rental prices, but if landlords can maximize revenue based on those suggestions, why would they not? Landlords using YieldStar have the final say, but there’s strong encouragement from software that collects an untold sum of data. The public debate about algorithmic price-setting has mainly involved airlines and now apartments, though hotels are reported to use it, too. But what if it was extended to even more necessities, such as food, medicine, tuition, and clothes? The fear is a market where machines control the price of everything, pushing the operators responsible for setting the prices for increased profit maximization without negotiation.
These questions are why the cases against RealPage will be watched so closely. It is a story about the multifamily industry and the explosive increase in rents, but it also transcends the concerns of one sector. RealPage built a successful, powerful company on data, but the fundamental core of one of its most popular products is on trial. The class action lawsuits they face are tough enough, but they have also drawn the scrutiny of separate federal investigations, which could prove even more damaging. The price of rent is an emotional issue at a time when housing advocates have become more vocal than ever. Rent control ordinances are cropping up nationwide, and the White House has even chimed in recently with its own proposals for protecting renters’ rights. More Americans are renters than at any point in the past 50 years, and the average household is rent-burdened, according to a recent Moody’s Analytics report.
As the economy has slowed, rent prices are finally moderating. Seventy-four percent of the 100 most expensive cities for rent posted one-bedroom median rents in January that were either down or flat compared to the previous month. But decelerating rent growth now doesn’t take away the huge increases in recent years, and ProPublica’s report was like dumping gasoline on the flames for angry housing advocates. The outcome of these lawsuits against RealPage will have outsized implications for the multifamily industry, and they could determine the future of algorithm price-setting beyond real estate. RealPage may be a PropTech success story, but depending on how these cases go, it could end up more as a cautionary tale.