The property management software used by many corporate landlords, RealPage, is deploying AI to artificially inflate rental prices in the United States by more than $3.6 billion annually, according to a new report by the White House Council of Economic Advisers (CEA).

RealPage, owned by the private equity firm Thoma Bravo, includes a tool called "AI Revenue Management" that provides recommendations for rental prices based on data from competitors. The feature, according to the CEA, the Department of Justice (DOJ), and class action lawsuits, facilitates "price coordination." It allows individual landlords to "act as if they are a single dominant landlord, and use their collective market power to increase profits by setting higher prices."

According to the CEA, "nearly 1 in every 4 rental" in the multi-family housing sector "uses a RealPage pricing algorithm." In some metropolitan areas, including Atlanta and Dallas, more than 50% of multi-family units use RealPage to set prices.

The CEA report is the first effort to quantify the difference between prices set by landlords using RealPage and prices in a truly competitive market. Looking at data from 2023, the CEA found that "algorithmic pricing cost renters in algorithm-utilizing units $70 a month, or 4% of rent, on average nationally." In six metro areas — Atlanta, Denver, Dallas, DC, Riverside, and Tampa — the price increase attributable to RealPage exceeds $100 a month.

In aggregate, the CEA estimates that RealPage cost American renters $3.6 billion in 2023. This underestimates the true impact of RealPage's AI price-setting tool because it does not "include the price effects on rental units that do not use pricing algorithms." In other words, landlords that do not use RealPage can increase their prices because their competition has set higher prices using RealPage. These increases are not included in the CEA's estimate.

Feds sue RealPage for violating antitrust law

The new CEA report builds on a civil antitrust lawsuit filed in August by the DOJ and the Attorneys General of eight states. The lawsuit alleges that RealPage is perpetrating an "unlawful scheme to decrease competition among landlords in apartment pricing." The software, according to the DOJ, "deprives renters of the benefits of competition on apartment leasing terms and harms millions of Americans."

RealPage uses AI tools to eliminate the need for landlords to meet in a smoke-filled room to illegally cordinate prices — or communicate directly at all. While the tools deployed by RealPage are modern, the basic method of price coordination used by RealPage has a long history. A December report by the Center for Democracy and Technology notes that RealPage's tactics have the hallmarks of a "hub-and-spoke" system "under which competitors coordinate pricing and output decisions through a central clearinghouse 'hub.'" This kind of scheme "has been found to violate section 1 of the Sherman Act" even if the competitors never directly communicate. Prosecutors will need to prove "the competitors along the 'rim' had a 'conscious commitment to a common scheme designed to achieve an unlawful objective.'" RealPage, according to the DOJ complaint, set up the hub and then encouraged landlords to sign up, promising to "outperform the market 3% to 7%."

In response to the DOJ lawsuit, RealPage created a website defending its business practices. The core of RealPage's defense is that customers "always have 100% discretion to accept or reject software price recommendations."

Evidence gathered as part of a separate class action lawsuit against RealPage undercuts its argument. A core purpose of the RealPage software, according to RealPage, was to "outsource daily pricing and ongoing revenue oversight." According to the class action complaint, RealPage and the landlords using the software "have established a rigorous monitoring and compliance system to ensure cartel members adhere to RealPage [AI-optimize] pricing."

RealPage "assigns its [landlord] clients 'Pricing Advisors,' also called 'Revenue Managers,' to monitor the client’s compliance with [AI-optimized] pricing, and to disseminate confidential and commercially sensitive information provided to RealPage by the client’s competitors to encourage [AI-optimized] price compliance." Larger landlords bring this functionality in-house, hiring dedicated staff trained by RealPage.

Deviation from the AI-optimized price frequently requires "approval from a RealPage Pricing Advisor or an internal RealPage-trained revenue manager, and often approval from senior management [of the building owner]." A former leasing agent at Lincoln Property Company, one of the landlords named in the class action lawsuit, said that "deviation requests were rejected almost 99% of the time, and that Lincoln’s corporate office would reiterate that RealPage’s 'rates are what they are.'" Witnesses formerly employed by other defendants offered similar testimony about the futility of seeking to deviate from RealPage's price "recommendations."

While the DOJ's civil lawsuit and the class action lawsuit are ongoing, a separate criminal investigation related to RealPage by the DOJ appears to have concluded. In December, RealPage said they received notice that the DOJ has "closed its criminal investigation." The DOJ did not respond to a request for comment.

Cities fight back

Cities impacted by RealPage's AI pricing scheme are not waiting for lawsuits against the company to wind their way through the legal system. In September, San Fransisco passed a new law that "prohibits the sale or use of algorithmic devices to set rents or manage occupancy levels for residential units" in the city. Violators are subject to fines of $1,000 per violation and monetary damages. In October, the Philadelphia City Council passed similar legislation on a 17-0 vote. It was signed into law by the mayor in November.

Other cities are considering following suit. A ban on RealPage and similar software has been proposed in San Jose. A bill prohibiting landlords from engaging in algorithmic price coordination has advanced through a House committee in the New Jersey legislature.

Legislation has also been proposed in San Deigo by the city council president, the Markup reports. Rents in San Diego have increased by 21% since 2020. That follows a 26% increase in the city rents from 2017 to 2020. According to the CEA report, renters in San Diego pay $99 more per month as a result of landlords using RealPage's AI price-setting tool.