# How a Secret Rent Algorithm Pushes Rents Higher

"""
"We said there's way too much empathy going on here," he said. "This
is one of the reasons we wanted to get pricing off-site." [...] "The
net effect of driving revenue and pushing people out was $10 million
in income," Campo said. "I think that shows keeping the heads in the
beds above all else is not always the best strategy."
"""

Texas-based RealPage's YieldStar software helps landlords set prices
for apartments across the U.S. With rents soaring, critics are
concerned that the company's proprietary algorithm is hurting
competition.

On a summer day last year, a group of real estate tech executives
gathered at a conference hall in Nashville to boast about one of
their company's signature products: software that uses a mysterious
algorithm to help landlords push the highest possible rents on
tenants.

"Never before have we seen these numbers," said Jay Parsons, a vice
president of RealPage, as conventiongoers wandered by. Apartment
rents had recently shot up by as much as 14.5%, he said in a video
touting the company's services. Turning to his colleague, Parsons
asked: What role had the software played?

"I think it's driving it, quite honestly," answered Andrew Bowen,
another RealPage executive. "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."

The celebratory remarks were more than swagger. For years, RealPage
has sold software that uses data analytics to suggest daily prices
for open units. Property managers across the United States have
gushed about how the company's algorithm boosts profits.

"The beauty of YieldStar is that it pushes you to go places that you
wouldn't have gone if you weren't using it," said Kortney Balas,
director of revenue management at JVM Realty, referring to RealPage's
software in a testimonial video on the company's website.

The nation's largest property management firm, Greystar, found that
even in one downturn, its buildings using YieldStar "outperformed
their markets by 4.8%," a significant premium above competitors,
RealPage said in materials on its website. Greystar uses RealPage's
software to price tens of thousands of apartments.

RealPage became the nation's dominant provider of such rent-setting
software after federal regulators approved a controversial merger in
2017, a ProPublica investigation found, greatly expanding the
company's influence over apartment prices. The move helped the
Texas-based company push the client base for its array of real estate
tech services past 31,700 customers.

The impact is stark in some markets.

In one neighborhood in Seattle, ProPublica found, 70% of apartments
were overseen by just 10 property managers, every single one of which
used pricing software sold by RealPage.

To arrive at a recommended rent, the software deploys an algorithm--a
set of mathematical rules--to analyze a trove of data RealPage
gathers from clients, including private information on what nearby
competitors charge.

For tenants, the system upends the practice of negotiating with
apartment building staff. RealPage discourages bargaining with
renters and has even recommended that landlords in some cases accept
a lower occupancy rate in order to raise rents and make more money.

One of the algorithm's developers told ProPublica that leasing agents
had "too much empathy" compared to computer generated pricing.

Apartment managers can reject the software's suggestions, but as many
as 90% are adopted, according to former RealPage employees.

The software's design and growing reach have raised questions among
real estate and legal experts about whether RealPage has birthed a
new kind of cartel that allows the nation's largest landlords to
indirectly coordinate pricing, potentially in violation of federal
law.

Experts say RealPage and its clients invite scrutiny from antitrust
enforcers for several reasons, including their use of private data on
what competitors charge in rent. In particular, RealPage's creation
of work groups that meet privately and include landlords who are
otherwise rivals could be a red flag of potential collusion, a former
federal prosecutor said.

At a minimum, critics said, the software's algorithm may be
artificially inflating rents and stifling competition.

"Machines quickly learn the only way to win is to push prices above
competitive levels," said University of Tennessee law professor
Maurice Stucke, a former prosecutor in the Justice Department's
antitrust division.

RealPage acknowledged that it feeds its clients' internal rent data
into its pricing software, giving landlords an aggregated, anonymous
look at what their competitors nearby are charging.

A company representative said in an email that RealPage "uses
aggregated market data from a variety of sources in a legally
compliant manner."

The company noted that landlords who use employees to manually set
prices "typically" conduct phone surveys to check competitors' rents,
which the company says could result in anti-competitive behavior.

"RealPage's revenue management solutions prioritize a property's own
internal supply/demand dynamics over external factors such as
competitors' rents," a company statement said, "and therefore help
eliminate the risk of collusion that could occur with manual pricing."

The statement said RealPage's software also helps prevent rents from
reaching unaffordable levels because it detects drops in demand, like
those that happen seasonally, and can respond to them by lowering
rents.

RealPage did not make Parsons, Bowen or the company's current CEO,
Dana Jones, available for interviews. Balas and a Greystar
representative declined to comment on the record about YieldStar.
The National Multifamily Housing Council, an industry group, also
declined to comment.

Proponents say the software is not distorting the market. RealPage's
CEO told investors five years ago that the company wouldn't be big
enough to harm competition even after the merger. The CEO of one of
YieldStar's earliest users, Ric Campo of Camden Property Trust, told
ProPublica that the apartment market in his company's home city alone
is so big and diverse that "it would be hard to argue there was some
kind of price fixing."

What role RealPage's software has played in soaring rents--which in
the decade before the pandemic nearly doubled in some cities--is hard
to discern. Inadequate new construction and the tight market for
homebuyers have exacerbated an existing housing shortage.

But by RealPage's own admission, its algorithm is helping drive rents
higher.

"Find out how YieldStar can help you outperform the market 3% to 7%,"
RealPage urges potential clients on its website.

Few tenants know that such software, owned by a privately held
company, has had a hand in rent increases across the country.

In Boston, renter Kaylee Hutchinson said she was puzzled when her
landlord--unbeknownst to her, a RealPage client--told her days into
the first pandemic lockdowns that her rent was going up. Building
staff insisted that the market rate for her apartment was 6.5% higher
than she was paying, despite her protests that people were fleeing
the city.

[Kaylee Hutchinson's landlord, who uses RealPage's pricing software,
told her rent was going up at the start of the pandemic even as many
people were fleeing the city.]

A few weeks later, she and her fiancé saw a newly vacant unit in
their building advertised online for less. One of their landlord's
policies permitted moving to another unit owned by the company, so
they did.

Hutchinson, who is an analyst for the police department, wondered if
a computer algorithm was behind building staff's inflexibility. "It
was pretty obvious they should have been dropping prices," she said.
"They were digging their heels in."

Hutchinson said she watched apartments in her building sit vacant at
prices that didn't make sense to her.

"A normal mom-and-pop landlord, they're worried about having a good
tenant and protecting their interest in the agreement," Hutchinson
said. "These companies, they'll just replace you."

# The Origins of YieldStar

One of YieldStar's main architects was a business executive who had
personal experience with an antitrust prosecution.

A genial, self-described "numbers nerd," Jeffrey Roper was Alaska
Airlines' director of revenue management when it and other major
airlines began developing price-setting software in the 1980s.

Competing airlines began using common software to share planned
routes and prices with each other before they became public. The
technology helped head off price wars that would have lowered ticket
prices, the Department of Justice said.

The department said the arrangement may have artificially inflated
airfares, estimating the cost to consumers at more than a billion
dollars between 1988 and 1992. The government eventually reached
settlements or consent decrees for price fixing with eight airlines,
including Alaska Airlines, all of which agreed to change how they
used the technology.