Welcome to the Real Estate Espresso Podcast, your morning shot at what's new in the world of real estate investing.I'm your host, Victor Menasche.
The city of Philadelphia just passed a new ordinance with a vote of 17 to zero, banning the use of algorithmic pricing for properties in the city.
The impetus for the bill came from many sources, including the current struggles of Philly tenants and tenant unions, as well as the documented impact of certain revenue management software services.That's according to Philadelphia City Council.
The targeted systems use private leasing information provided by their end users as well as large corporate landlords managing multifamily properties.
The data is then posted and filtered through proprietary algorithms that aggregate rental prices across local markets. And the argument is that this encourages landlords to push local pricing right to the ceiling for housing.
San Francisco was the first city to enact such a ban, and Philadelphia is the second.It's expected others across the nation will follow suit.The city bill references an antitrust motion brought by the U.S.Justice Department.
Back in August, the Justice Department sued real estate company RealPage, saying it's engaged in price fixing to drive up rents.
The Attorney General of eight states—North Carolina, California, Colorado, Connecticut, Minnesota, Oregon, Tennessee, and Washington—have joined the Justice Department's antitrust suit in federal court in North Carolina.
The Justice Department alleges that RealPage's algorithmic pricing lets landlords of multifamily apartments effectively collude and set rents above the market rate.
That deprives renters of the benefits of competition on apartment leasing terms and harms millions of Americans."That's a quote.
Americans should not have to pay more in rent just because a company has found a new way to scheme with landlords to break the law.That's a quote from Attorney General Merrick Garland.
The lawsuit alleges that RealPage's pricing algorithm enables landlords to share confidential competitive information to align their rents.And according to the complaint,
The information includes things like current rents, vacancy rates, and lease expiration dates.So then on a daily basis, the software uses the data and artificial intelligence to suggest what the rent a landlord should charge.
RealPage has pitched this software as maximizing landlords' profits, and it's boasted that it lets them outperform the market.
RealPage denied that their pricing software is anti-competitive and said that it lowers rents when demand drops and can help reduce rates.
Attorney General Merrick Garland noted that the lawsuit was brought under the Sherman Antitrust Act, a law passed more than a century ago when anti-competitive scheme might have looked more like robber barons shaking hands at a secret meeting.
Landlords colluding through mathematical algorithms might be new, but he said it violates the same bedrock principle of a free market fostering competition.
The Department of Justice alleges the company has a monopoly by virtue of controlling 80% of the U.S.market share for this kind of software.
And while RealPage says its program only offers a recommendation on pricing, the complaint suggests that that recommendation is hard to reject. Landlords are encouraged to configure to the product to automatically accept the real page recommendation.
That's according to Eric Dunn, a tenant rights lawyer with the National Housing Law Project.And if the property manager doesn't want to accept the recommendation, they have to put in an explanation, which is then sent to a regional manager.
Dunn sees this kind of peer pressure can build up among landlords. The complaint describes RealPage holding online training sessions in which property managers chat with each other, and also says that landlords communicate directly in other ways.
The company has boasted that landlords who coordinate instead of competing can eliminate concessions, like offering lower rent or a free month.Instead, as RealPage has put it, a rising tide raises all ships.
In some markets across the country, more than half the landlords use RealPage's pricing software.Friday's lawsuit is not the first to target the company's software.There's some 20 other lawsuits nationwide.
In a recent and somewhat related case, hotels in Las Vegas were also accused of sharing information via different pricing software and using it to artificially inflate room rates.
A judge threw out that case in May saying the plaintiffs had not shown the hotels made any agreement with one another to fix prices.Some other pricing software companies also worry that the Department of Justice lawsuit could hurt their reputations.
Now the reason I'm bringing this forward to you is because there's lots of market data out there and there's increasingly sophisticated software designed to share market data.
What's not clear is when you cross a line between simply accessing market data versus price fixing.If you have a ton of data available, then presumably you have more data available than might be out in the public domain.
Does that by its very nature make it anti-competitive?And does that put you on the wrong side of antitrust regulations?This is an area that's going to definitely be tested in the courts over the coming weeks and months.
It's something that as landlords, you definitely want to pay close attention to as you think about that.Have an awesome rest of your day.Go make some great things happen.We'll talk to you again tomorrow.
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