From the editors of The Chronicle

Washington state Attorney General Bob Ferguson joined a bipartisan group of eight state attorneys general and the federal Justice Department on Friday, August 23, to file a lawsuit accusing a national software company of colluding with landlords to drive up rent prices.

The lawsuit accuses RealPage of sharing competitively sensitive, nonpublic data through its software with rival landlords to help them increase rents and maximize their profits. An estimated 800,000 leases in Washington have been billed using RealPage’s revenue management software since 2017.

A potential RealPage customer described the company’s model as “classic price-fixing,” according to a press release from the state Attorney General’s Office.

RealPage also facilitates user group meetings between competing landlords to share competitive information and encourage discussion about pricing.

A RealPage vice president explained, “It’s better for everyone to be successful than for us to essentially compete with each other in a way that actually weakens the industry.”

The lawsuit also claims that the software encourages landlords to raise rents even when they have more vacant units on the market. These practices artificially inflate rents, the lawsuit says. Washington state has some of the highest housing costs in the country.

“RealPage has conspired to manipulate prices and keep rents rising to increase profits,” Ferguson said. “Housing costs are a burden on too many working families. My legal team and I will oppose these arrangements and fight for affordable rents for Washington residents.”

The lawsuit, filed in the U.S. District Court for the Middle District of North Carolina, alleges that RealPage violated the federal Sherman Antitrust Act.

The lawsuit alleges that RealPage uses nonpublic, competitively sensitive data it collects from landlords to feed its algorithm, which creates coordinated pricing recommendations to maximize profits for all of its landlord users. The stated goal is to reduce competition and increase profits. The lawsuit alleges that RealPage’s software products – AI Revenue Management, Yieldstar and LRO – often recommend keeping rents the same or increasing them even when occupancy rates are falling and landlords are struggling to fill units. In a competitive market, low occupancy rates often lead to lower rents.

AI Revenue Management (AIRM) is RealPage’s latest product that uses artificial intelligence to drive rent pricing. RealPage plans to use AIRM as a replacement for its legacy Yieldstar and Lease Rent Options (LRO) software. RealPage has become the leading provider of revenue management software for U.S. landlords.

A recent report from the National Low Income Housing Coalition found that Washington has the nation’s fifth-highest “housing wage” – the hourly wage required to afford rent on a two-bedroom home. A working family in Washington needs to earn about $40 an hour, or more than $83,000 a year, to avoid spending more than 30 percent of their income on rent for a two-bedroom home. The average renter in Washington makes just $29 an hour.

According to a Washington Post analysis of rental data, Washington has seen some dramatic rent increases above the national average over the past five years. For example, rents in Pierce, Snohomish, Whatcom, Walla Walla and Thurston counties have increased by more than 25% since 2019. Rents in Skagit, Benton and Spokane counties have increased by more than 30%, and rents in Chelan County have increased by 41%. Nationally, rents have increased by about 19% over the same period.

Across the country, a quarter of U.S. households — about 10.4 million — spent more than half their income on rent in 2021. That’s an increase of about 1 million households since 2019. By 2022, 12.1 million households spent more than half their income on rent.

In 2000, the average non-college graduate spent 30% of their income on rent. In 2017, that figure rose to 42%.

Although college graduates spend a smaller percentage of their income on rent, their share is also increasing. In 2021, college graduates spent an average of 24% of their income on rent. In 2022, they spent more than a third of their income.

Ferguson launched his investigation in January 2023 after a ProPublica article detailed how RealPage’s algorithm could contribute to rising rents across the country.

Ferguson’s investigation found that RealPage collects nonpublic, competitively sensitive data from its users to feed the algorithms of its revenue management software. Landlords who use RealPage software agree to provide their data, which the software then combines with data from other landlords.

The algorithm then recommends rents – and in many cases even increases them. In feedback on RealPage’s software, a potential customer said: “I’ve always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and terms. This is classic price fixing.”

RealPage’s software creates price recommendations that cannot fall below a fixed lower limit, but can exceed a soft upper limit at the upper end of the market.

RealPage also discourages renters from negotiating and conceding prices in favor of the highest possible price in several ways. First, RealPage advises new customers in its training to set the software to automatically accept price recommendations. If a customer does not want to use automatic acceptance, RealPage consultants are trained to convince them to turn it on.

RealPage also encourages property managers to accept its pricing recommendations by forcing them to provide an explanation when they reject the software’s recommendations. When RealPage consultants notice the rejections, they can pass them on to the property owners.

RealPage’s software also advises landlords to keep prices high even when occupancy is declining, the lawsuit says. The software also recommends adjusting lease terms to avoid an oversupply of apartments coming onto the market at the same time — for example, it recommends leases with terms of 13 months instead of 12. That way, rental prices don’t drop due to increased supply.

Ferguson’s lawsuit seeks to stop RealPage’s illegal business practices and force RealPage and landlords to stop sharing confidential, nonpublic competitive information and colluding to align their prices.