Feds raid corporate landlord, escalating nationwide criminal probe of rent increases
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Over the last four years, rents have skyrocketed by an average of over 30% nationwide and are a major factor in the overall inflation rate. There are a variety of factors behind the increases, including an overall housing shortage. But the Department of Justice is investigating another potential cause: a massive criminal conspiracy among large landlords. Last month, the FBI reportedly conducted an unannounced raid of Cortland Management, a major corporate landlord based in Atlanta. The surprise search appears to be part of a Department of Justice criminal investigation, first reported by Politico in March, into an alleged scheme among many corporate landlords to artificially increase rents through collusion. The investigation centers around the use of RealPage, advanced property management software used by many corporate landlords. Following a 2022 exposé by ProPublica, RealPage and landlords that use the software have been named defendants in multiple class action lawsuits, as well as actions filed by the Attorneys General of Arizona and Washington, DC. According to the lawsuit filed by the State of Arizona in February, landlords that are supposed to be in competition with each other "outsource daily pricing and ongoing revenue oversight" to RealPage. The company allegedly facilitates and encourages landlords to work cooperatively to increase rents. An e-book produced by RealPage says that the company allows corporate landlords who are “technically competitors” to "work together . . . to make us all more successful in our pricing." RealPage bragged that landlords that use its software “continually outpace the market in good times and bad.” In other words, RealPage helps landlords charge higher rates than they would in a truly competitive market. An executive for Camden Property Trust, a corporate landlord based in Houston, said deploying RealPage's software resulted in "pushing people out" with higher rents but ultimately increased revenue by $10 million. How corporate landlords collude via algorithmCorporate landlords that use RealPage software dominate the rental market in many metropolitan areas. In Phoenix, according to Arizona's lawsuit, "70% of multifamily apartment units listed in the Phoenix metropolitan area are owned, operated, or managed by companies that have contracted with RealPage." According to the lawsuit filed by DC, 60% of large multifamily buildings (50 units or more) set prices using RealPage's software. RealPage's former CEO revealed that participating landlords share "occupancy rates, rents charged for each unit and each floorplan, lease terms, amenities, move-in dates, and move-out dates." After feeding in this highly-detailed information that would normally be kept proprietary, "landlords agree to outsource their pricing authority to RealPage—rather than competing with one another on price." RealPage even has a feature called "auto-pilot" that lets the software set rent prices without any human approval or intervention. The system has resulted in large rent increases that were previously unthinkable, according to RealPage's own executives. “As a property manager, very few of us would be willing to actually raise rents double digits within a single month by doing it manually," RealPage executive Andrew Bowen said. Arizona's lawsuit alleges that RealPage "puts significant pressure on participants to ensure they adopt RealPage’s prices." Specifically, RealPage employs "pricing advisors" who "meet with landlords to ensure that properties are implementing RealPage’s set rates." This is described by Arizona as "policing the conspiracy to make sure no one cheats by lowering prices and trying to gain market share." RealPage training materials, cited in the DC lawsuit, advise that landlords "should be compliant" with the software's pricing recommendations. The Arizona lawsuit claims that landlords "agree that if they fail to consistently implement RealPage’s set rates, their contract with RealPage will be terminated." Jeffrey Roper, who created the RealPage algorithm, explained that if "you have idiots undervaluing, it costs the whole system." According to DC's lawsuit, this practice shows that "while RealPage sought to grow the cartel to maximize profits, it also understood the importance of universal adherence and was willing to expel an occasional cartel member to demonstrate its commitment to enforcement of the agreed-upon pricing scheme." While the RealPage software eliminates the need for competitors to meet in a smoke-filled room, Arizona asserts that it "is still illegal… for competitors to join together decision-making power to raise, depress, fix, or stabilize prices—no matter the technology used to effect a price-fixing agreement." Why the feds are focusing on AtlantaWhy is the FBI specifically raiding a corporate landlord that uses RealPage in Atlanta? The agency is not commenting, but a class-action lawsuit revealed that landlords who use RealPage control a large number of properties in the Atlanta area. According to the plaintiffs, landlords using RealPage "account for over 53% of the multifamily rental market in the Atlanta Submarket." This is a map, included in the complaint, which shows properties using RealPage software in the Atlanta area. The use of RealPage in the Atlanta area has coincided with a sharp increase in rental prices. Overall, rents in Atlanta are up 56% since 2016. Where will the FBI conduct its next raid? They have plenty of choices. RealPage also controls a large share of the market in Baltimore, Charlotte, Houston, and Miami. RealPage says this is all a big misunderstanding. After DC filed its lawsuit in November 2023, the company said its critics were incorrectly drawing "a causal connection between revenue management software like ours and increases in market-wide rents." It said the lawsuit was "wrong on both the facts and the law and we will vigorously defend against it." Not everyone involved in the scheme is so confident. Earlier this year, two corporate landlords named in a class action lawsuit filed by tenants reached settlements with the plaintiffs. The terms were not disclosed. |
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