Landlords are leveraging AI technology to increase rental prices, prompting city authorities to resist.
If you've been on the hunt for apartments lately and noticed that the prices seem staggeringly high, you're not alone in your sentiment. Many landlords now rely on a single company's software, which uses an algorithm rooted in proprietary lease data, to help establish rental prices.
Critics claim that this practice is unlawful, amounting to an information-sharing scheme. Consequently, some legislators in California are working to put a stop to it. The city council president of San Diego is the latest to propose such a ban, aiming to prevent local apartment owners from utilizing the pricing service, which they contend is driving up housing costs.
This proposed sanction in San Diego follows a landmark move taken by San Francisco in July, which enacted the nation's first ban on "the sale or use of algorithmic devices to set rents or manage occupancy levels" for dwellings. San Jose is considering a similar approach.
Similar restrictions have gained traction or are being contemplated in other parts of the country. For instance, Philadelphia's City Council enacted a ban on algorithmic rental price-fixing in September. New Jersey is also considering such a ban.
Federal authorities, in collaboration with the attorneys general of eight states, including California, North Carolina, Colorado, Connecticut, Minnesota, Oregon, Tennessee, and Washington, filed an antitrust lawsuit against RealPage, a prominent rental pricing platform headquartered in Texas. The lawsuit asserts that RealPage "collects, combines, and exploits landlords' competitively sensitive information" to the detriment of renters who ultimately end up paying exorbitant prices.
RealPage's influence in this matter has been significant, with some officials faulting the company for stifling competition that would otherwise dampen rents, exacerbating the country's housing shortage, and intensifying rents in the process.
RealPage has defended itself against these accusations, stating, "Every day, millions of Californians worry about keeping a roof over their head and RealPage has directly made it more difficult to do so." In response to the federal lawsuit, the company called the claims leveled against it "devoid of merit."
In 2020, an investigation carried out by The Markup and The New York Times found that RealPage and other companies utilized faulty computer algorithms for automated tenant background checks, which led to tenants being falsely associated with criminal records and ultimately denied housing.
Is it price fixing—or coaching landlords?
Federal prosecutors argue that RealPage holds a dominant 80% market share in the commercial revenue management software sector. Its product, YieldStar, is highly successful, and its successor, AI Revenue Management, shares much of the same codebase as YieldStar and features more precise forecasting. RealPage claims that its software only serves 10% of the rental markets in both San Francisco and San Diego, across its three revenue management software offerings.
In order to utilize YieldStar and AI Revenue Management, landlords historically provided RealPage with their private rental application data, rent prices, signed leases, lease renewals, and estimates of future occupancy. However, a recent update allows landlords to choose to share only public data. All of the participating landlords' data in a given area is then pooled and processed through algebraic projections to generate pricing recommendations for the landlords and their competitors.
San Diego City Council President Sean Elo-Rivera describes the process as follows:
"In the simplest terms, what this platform is doing is providing that dark, smoky room for big companies to get together and set prices," said Elo-Rivera. "The technology is being used as a way of keeping an arm's length from one big company to the other. But that's an illusion."
The company's own documents, included in the lawsuit, admit to "ensuring that (landlords) are driving every possible opportunity to increase price even in the most downward trending or unexpected conditions." The documents also highlight the company's role in restraining landlords from lowering rents or holding prices steady amid market downturns.
The impact on tenants
Thirty-one-year-old Navy veteran Alan Pickens and his wife have had to relocate nearly every year due to escalating rental prices. "The rent goes up, it gets unaffordable, so we look for a new place to stay," said Pickens. The northeastern San Diego apartment complex where they recently moved offers two-bedroom apartments for between $2,995 and $3,215.
They reside in an area of San Diego where the U.S. Justice Department argues that information-sharing agreements between landlords and RealPage have harmed or are likely to harm renters.
The authority filed a lawsuit against RealPage in August, claiming that through its YieldStar software, the company was partaking in an "unfair practice to reduce competition among landlords in apartment pricing" regulations. The lawsuit names areas like San Diego, where Pickens resides, along with South Orange County, Rancho Cucamonga, Temecula, Murrieta, and northeastern San Diego, as places with inflated, artificially-high rents.
Data from the second quarter of 2020 indicates that the average rent in San Diego County was $1,926, a 26% increase over a three-year period, as reported by the San Diego Union-Tribune. This increase has grown even further in San Diego City, reaching $2,336 per month as of November 2024 – an increase of 21% since 2020, according to RentCafe and the Tribune, making it 50% higher than the national average rent.
The legal representatives of eight states, including California, joined the U.S. Department of Justice's antitrust lawsuit, filed in U.S. District Court for the Middle District of North Carolina.
The California Department of Justice alleges that RealPage artificially boosted prices, keeping them above a certain level. This practice was particularly damaging given the high housing costs in the state, according to department spokesperson Elissa Perez. The illegally maintained profits from these price alignment schemes significantly impact the resources of those least capable of affording it, she added.
Renters make up a more considerable percentage of households in California (44%) compared to the nationwide average of 35%. According to the latest U.S. Census data, California also has a higher percentage of renters than any state other than New York.
San Diego ranks fourth among major U.S. cities in terms of the percentage of renters.
Recent California legislators have largely consisted of homeowners, with only one non-homeowning state lawmaker discovered as of 2019, and over a quarter of legislators being landlords.
Studies show that low-income residents are disproportionately affected by rising rents. Between 2000 and 2017, the percentage of income Americans without a college degree spent on rent increased from 30% to 42%. For college graduates, this figure rose from 26% to 34%.
“In my view, only the wealthiest companies benefit from this situation, either by using or developing this technology,” said Elo-Rivera. “It is a clear example of the rich becoming richer while the rest struggle to make ends meet.”
The state has invested in RealPage
Private equity firm Thoma Bravo purchased RealPage in January 2021 via two funds, which received hundreds of millions of dollars in investments from California public pension funds, including the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the Regents of the University of California, and the Los Angeles police and fire pension funds, according to Private Equity Stakeholder Project.
“They invest in things that hurt their pensioners directly,” said K Agbebiyi, a senior housing campaign coordinator with the Private Equity Stakeholder Project, a nonprofit private equity watchdog that produced a report on the impact of corporate landlords on rental increases in San Diego.
RealPage argues that landlords are free to disregard the pricing suggestions generated by its software. However, the U.S. Justice Department maintains that property managers must go through a series of steps to do so, including consulting with a RealPage pricing advisor. These advisors, according to the department's lawsuit, aim to “suppress property managers’ emotional decisions.”
If a property manager disagrees with the price suggested by the algorithm and wishes to reduce rent instead of increase it, the dispute is escalated to their superior, alleges the suit.
In San Diego, the Pickenses, who are expecting their first child, have given up their gym memberships and downsized their vehicles to remain in the area. They have even considered relocating to Denver.
“All the extras pretty much have to go,” said Pickens. “I mean, we love San Diego, but it's becoming increasingly difficult to live here.”
“My wife is an attorney, and I served in the Navy for 10 years and now work at Qualcomm,” he said. “Why are we struggling? Why are we struggling?”
This article originally appeared on The Markup and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
In response to concerns about price fixing in the rental market, some legislators are exploring bans on the use of algorithmic devices for setting rents or managing occupancy levels, citing the dominant market share and information-sharing practices of companies like RealPage as potential issues. The technology used by these companies, such as YieldStar and AI Revenue Management, relies on proprietary lease data and algorithms to establish rental prices, and critics argue that this practice can lead to artificially high rents.
Amidst this debate, the future of tech in the housing market and the role of artificial intelligence in determining rental prices is becoming increasingly contentious. Critics argue that AI and algorithmic pricing can exacerbate housing affordability issues, while proponents argue that it can provide more accurate and efficient pricing data for landlords. As the debate continues, the impact of technology on rental prices and housing affordability will be a key consideration for policymakers and stakeholders in the housing market.
