The pitfalls of letting an algorithm set the rent

Many large property owners use rent-pricing software to figure out what to charge their tenants.

That practice has come under scrutiny after ProPublica produced an investigative report on the software company RealPage and its rental-pricing algorithm last fall.

Several lawsuits have accused RealPage of colluding with landlords to artificially inflate rents and limit the supply of housing. The Department of Justice is also investigating.

Marketplace’s Amy Scott spoke with Heather Vogell, a reporter at ProPublica who has been following developments since her initial investigation of RealPage’s algorithm came out.

The following is an edited transcript of their conversation.

Heather Vogell: What [the algorithm] does is it collects the actual lease transaction data from a group of competitors that are in the same geographic area. And it feeds that information into an algorithm that then spits out a recommended price for the landlord that’s looking to price their available apartments.

Amy Scott: And how has that contributed to higher rents in some markets, according to your findings?

Vogell: Well, what critics are saying — and some legal experts — is that this process of this algorithm allows competitors to essentially all raise their prices at the same time, which inflates prices in the market above where they would be otherwise, and that there is actual coordination that’s happening between the landlords via this algorithm. There were more than two dozen lawsuits — that’s where I stopped counting — federal lawsuits, antitrust lawsuits, that were filed after our investigation. The Department of Justice is now, their antitrust division is looking at whether there have been any potential antitrust violations here. And also, we’ve had congressional leaders who’ve been concerned about this and about the impact on consumers who have been urging federal authorities to look into the company more and also asking for more information from the company itself.

Scott: Talk about Seattle. This is one place where you saw large numbers of landlords using this algorithm.

Vogell: Yeah, sure. I was really surprised at this finding. We looked in one ZIP code near downtown and found that 70% of more than 9,000 apartments, in large apartment buildings in that ZIP code, were being managed by only 10 property managers. And that just shows that there’s this enormous concentration in the landlord market in this particular ZIP code. And I think it’s similar in other ZIP codes, in certain markets around the country. And of those 10 property managers, every single one was using RealPage software to price their apartments and at least some of their buildings.

Scott: And how has RealPage responded?

Vogell: RealPage says that they “use aggregated market data in a legally compliant manner.” They’ve actually said that their process heads off potential collusion because historically, leasing agents have called around and asked each other what is being charged and sort of work together that way. And according to RealPage, their software basically takes the human element out of that and leads to less collusion.

Scott: Another way it takes the human element out of rent setting is what you talk about as “empathy” in the article. Legal implications aside, do you worry that this sort of clinical approach to setting rent is just changing that landlord-tenant relationship in an unhealthy way?

Vogell: That is the concern, and I’ve heard that concern not only from tenants, but also from leasing agents. And they are sort of being steamrolled in some cases, according to them, by these big corporations that are using this software and are not relying on their judgment, not relying on their knowledge of their tenants and where their tenants are at financially, potentially, and where the building is at. You know, instead it’s sort of handing down these price increases without regard to those sorts of things, those more human parts of the job.

Scott: What do we know about how common it is for property owners and managers to use algorithms? Are there competitors to RealPage?

Vogell: Well, what’s interesting about that is there was another competitor that was pretty big. And it was basically about the same level RealPage was, but in 2017, RealPage bought the competitor. So at the time, RealPage was pricing about a million and a half apartments, and the competitor was pricing about a million and a half apartments. And RealPage bought them, and now RealPage has that entire market share and has also expanded its reach since then.

Scott: Where do you see this going from here? I mean, you expect there to be some regulatory efforts to come out of the investigation and potentially some penalties for the company?

Vogell: That is definitely a potential that we are following and looking to see. It is going to be very interesting because it is an unusual case because of the role of the algorithm. It’s not like a lot of traditional antitrust cases where you had, you know, you always think of guys getting together in the smoke-filled back room, making agreements and, you know, with their cigars and everything and, you know, deciding, “OK, we’re gonna raise prices this much.” It’s not like that. It’s a whole new world and so we’ll have to see kind of what shakes out legally and you know, in the regulatory arena.

Related links: More insight from Amy Scott

We reached out to RealPage for comment. You can read the full statement below:

RealPage believes the allegations are completely without merit and will vigorously defend against the lawsuits. The complaints filed are wrong on both the facts and the law. RealPage’s revenue management software is purposely built to be legally compliant, and the allegations are based on an inaccurate understanding of how our software works.

RealPage spokesperson

My colleague Matt Levin recently wrote about how landlords think about setting rent. As you might expect, smaller property owners aren’t using the software as often as bigger, corporate ones.

And the controversy over algorithmic pricing isn’t just limited to apartment rents. Check out this recent story from Reuters about another class-action lawsuit filed in January.

Plaintiffs accuse the revenue management platform Rainmaker of colluding with Caesars Entertainment, MGM, Treasure Island and Wynn Resorts to set prices of hotel rooms on the Las Vegas Strip.