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The Lawsuit That Could Change PropTech

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Last week I wrote about a ProPublica article that accused RealPage’s price tool YieldStar of creating what was effectively a pricing cartel thanks to its use by many of the country’s large landlords. Now those accusations have jumped from the pages of a publication to the docket of a U.S. District Court. The complaint was filed in San Diego and lists RealPage along with landlords like Graystar, Lincoln Property Group, and Equity Residential as defendants.

The lawsuit claims that YieldStar is causing a few non-competitive practices. The complaint explains that “Since residential real estate is a perishable resource (if a unit sits vacant for a month, a Lessor can never monetize that lost month of rent).” That means landlords traditionally “favored a strategy of keeping ‘heads in the beds.’” The theory is that the need to lower vacancy would push landlords to keep their prices competitive, especially when demand is low.

But plaintiffs are saying that that is no longer how the industry operates: “However, beginning in approximately 2016, and potentially earlier, Lessors replaced their independent pricing and supply decisions with collusion,” the complaint claims. While calling it collusion is certainly subjective there is truth to the statement that “Lessors agreed to use a common third party that collected real-time pricing and supply levels, and then used that data to make unit-specific pricing and supply recommendations.”

It may be tricky for the plaintiff in this lawsuit to prove that landlords were raising rent specifically because of YieldStar recommendations, they could certainly have come to that conclusion on their own. But the way that RealPage has advertised its role in recent rental increases could be considered a bit daming. The report says, “RealPage is proud of its role in the exploding increase in the prices of residential leases. In a marketing video used to attract additional Lessors to the conspiracy, a RealPage Vice President discussed the recent and never-before seen price increases for residential real estate leases, as high as 14.5% in some markets. When another RealPage executive asks: ‘What role has the [RealPage] software played’ in those increases, the RealPage Vice President responded: ‘I think it’s driving it, quite honestly.’”

What might be even easier to prove is the second accusation in the complaint, that RealPage was suggesting that units be left vacant in order to prevent too much supply hitting the market at one which would put downward pressure on prices. “To avoid the consequences of lawful competition, RealPage provides Lessors with information sufficient to ‘stagger’ lease renewals to avoid oversupply,” the lawsuit claims. “Lessors 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.”

Since leaving space vacant is not in the landlord’s best interest it could certainly be seen as a non-competitive act. If a large part of the market is colluding in these kinds of non-competitive practices, whether intentional or not, it could be acting as a cartel which is legally defined as “an arrangement among supposedly independent corporations or national monopolies in the same industrial or resource development field organized to control distribution, set prices, reduce competition, and sometimes share technical expertise.

The goal of many tech companies is to collect enough proprietary information to monetize. This is where many of the world’s biggest companies like Google and Facebook have proven their value. If the judge sides with the plaintiffs of this lawsuit then this same strategy might not apply to real estate, especially when it comes to pricing. RealPage had built something that every PropTech company dreams of, a valuable service to clients and a true competitive moat. But that moat might be drained and filled in if lawyers and regulators are able to effectively challenge the competitiveness of this act.

No matter what your feelings are on the merits of these cases, make no mistake, it will have repercussions throughout the property industry. Not only will tech companies be weary going forward of how they advertise their ability to help landlords increase rent, property companies will be less likely to use these tools and open themselves up to the legal repercussions that go with it. I will be watching this case, and the nearly certain appeals, closely and will cover it again when more information arises.

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