In This Article
Key Takeaways
Software company, RealPage, is being accused and investigated by the Department of Justice of price-fixing in conjunction with large landlords to drive up rents. Opponents suggest that RealPage’s pricing algorithm purposely creates a “house always wins” scenario.The investigation is underlined by the nationwide housing shortage, increased homelessness, and an affordability crisis.
A housing cartel? No, not in a lawless narco-state, but in major American cities, where corporate landlords have been accused of conspiring with Texas-based real estate software company RealPage to drive up rents.
Most recently, Atlanta-based Cortland Management, one of America’s largest landlords, was served a warrant by the FBI concerning an ongoing antitrust investigation into multifamily housing price-fixing by the Department of Justice (DOJ). According to Cortland Management’s website, the company is worth $218 billion and manages 85,000 units in 13 states.
RealPage has launched a robust defense, with much of its website dedicated to debunking the accusations of price-fixing. It claims that, in many cases, it recommends lowering housing prices instead of raising them.
RealPage’s Reach
RealPage states that it serves over 24 million units worldwide from offices in North America, Europe, and Asia (including 4.5 million rental apartments in the U.S.), using algorithmic pricing to gauge the rents for each property they serve in conjunction with the recommendations of their management company-clients. It is that aspect of their business the FBI is mainly concerned with.
Private equity firm Thoma Bravo purchased RealPage in 2021 for nearly $10 billion, and shortly afterward, complaints about the company started. Renters stretching from Seattle to New Jersey brought two dozen class-action lawsuits shortly after the company was acquired.
Tenants claim that RealPage’s alleged monopoly over the U.S. housing market has put them in a “house always wins” situation, where rents escalate no matter how they turn. Should they choose to renew their lease, their rents will increase according to RealPage’s new number. Should they move, their rent will escalate as other property management companies use RealPage to hike up rents aggressively.
Initial tenant complaints were consolidated into one case heard in the Federal District Court in Nashville. That case gained the attention of the DOJ and initiated the current antitrust investigation.
A Potentially Seismic Fallout
Cortland Management oversees properties in multiple states, including Arizona. State Attorney General Kris Mayes recently spoke about the case, saying: “The conspiracy allegedly engaged in by RealPage and these landlords has harmed Arizonans and directly contributed to Arizona’s affordable housing crisis. This conspiracy stifled fair competition and essentially established a rental monopoly in our state’s two largest metro areas.”
ProPublica.org, a website that aims to expose “abuses of power and betrayals of the public trust by government, business, and other institutions,” recently conducted its own investigation into RealPage, concluding that the software giant had indeed used its algorithms to aggressively and artificially inflate rents. Should the DOJ agree, the result could be a seismic case against some of America’s largest multifamily landlords. And as many of these rental units are bundled into REITs and traded on Wall Street, the resultant lawsuit could spiral into the billions.
The Political Angle
With housing and the cost of living hot topics of the next election, the Biden administration has made rent gauging and price hikes a central theme of its affordable housing policy. In his most recent State of the Union address, the president said, “We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents.”
In the U.S. Senate, Senators Peter Welch (D-Vt.) and Ron Wyden (D-Ore.) introduced the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act in January.
“Setting prices with an algorithm is no different from doing it over cigars and whiskey in a private club,” Wyden said in a press release. “Although it’s my view that these cartels are already violating existing antitrust laws, I want the law to be painfully clear that algorithmic price fixing of rents is a crime.”
RealPage Isn’t Alone
RealPage is not being singled out for potential punishment. Its software competitor, Yardi Systems, is also a target of the DOJ for similar allegations.
Going up against the DOJ is widely believed to be futile because of the government’s limitless resources, so most companies eventually choose to settle, which has already happened in some of the earlier RealPage cases filed in Nashville. Denver-based Apartment Income REIT, more commonly known as AIR, and Dallas-based Pinnacle Property Management Services, owned by real estate services firm Cushman & Wakefield, admitted no wrongdoing in choosing to end their suits early.
“AIR’s pricing decisions were, and continue to be, made by AIR teammates using internal information together with publicly available market data,” AIR said in a statement. “Despite the baselessness of the claims, AIR is pleased to exit the litigation early in a favorable manner.”
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A History of DOJ Intervention
The DOJ’s quest for greater competition in the housing market isn’t new. It has a long history of such cases dating back decades. Recently, the agency has been on a winning streak, playing a pivotal role in the antitrust class-action suits filed against the largest brokers in the country and the National Association of Realtors (NAR).
“We’ve been in their crosshairs for as long as I’ve been involved at the National Association of Realtors,” NAR president Kevin Sears, a licensed Realtor for 20-plus years, told hundreds in the industry at a conference in February.
Even though the DOJ wasn’t a party in the suit, according to news and analysis company Axios, the government agency has been investigating the real estate industry for years. In 2021, under a new administration, the agency filed to stop a previous settlement that would have stopped it going after the NAR. In February, the department filed an objection to a different settlement in a case over commissions in Massachusetts, which mirrored the larger case against the NAR, resulting in a $418 million settlement.
Final Thoughts
The U.S. government rarely loses a lawsuit, with most defendants settling long before cases go to court, as has already been the case in earlier suits against RealPage affiliates. Many of their current clients are bracing themselves for the fallout. RealPage’s assurances that their software complies with federal law will not likely stem the flow of developers peeling away from doing business with them.
“We are certainly advising clients to be prepared for a world without RealPage-style revenue management,” Parker Miller, an antitrust attorney representing corporate clients at the Alston & Bird law firm, told the Wall Street Journal.
Widening the lens, when a company sells for $10 billion, as with RealPage, there is a tremendous onus on the company to increase revenue to justify the investment. Whether that pressure resulted in RealPage crossing a legal line and colluding with landlords to the detriment of their tenants, as the DOJ claims, is yet to be entirely determined. What is not up for debate is the bad publicity, legal expenses of multiple court cases, and a DOJ investigation.
Many landlords have likely been blindsided by the case against a software company used throughout the country. The investigation is underlined by the nationwide housing shortage, increased homelessness, and people living from paycheck to paycheck. The need for affordable housing cannot be underestimated. Landlords who are able to fill this void—whether working with government agencies or independently—will likely be in demand for years to come.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
