By Conor Gallagher
After years of consolidation, US industries are now using advances in algorithms and the speed of data sharing to remove any vestige of market forces that are supposed to keep prices down.
In attempts to maneuver around antitrust restrictions, companies turn to data firms offering software that helps increase profits. How? By exchanging information with competitors in order to keep wages low and prices high – effectively creating national cartels.
The US Department of Justice might finally be waking up to the problem. According to Bloomberg Law:
The department’s antitrust division is withdrawing—with no plans to replace—a trio of policy statements outlining permissible conduct related to information sharing in the healthcare industry issued between 1993 and 2011, Principal Deputy Attorney General Doha Mekki said Thursday [Feb. 2] at an antitrust conference in Miami.
These safe harbor statements have been broadly interpreted by health care and other sector companies to share information.
Some exchanges can enable price and wage fixing and other forms of illegal conduct, Mekki said. …
“Given these changes and the outdated nature of many of the exchanges reflected in those documents, we are no longer confident that these statements fully reflect existing market realities or the full scope of liability under the antitrust laws,” Mekki said. …
Previous assumptions about industries that aren’t highly concentrated—that their information sharing, allowed under the DOJ’s safe harbor, wouldn’t likely violate the Sherman Act—is coming into question, Mekki said. The pace of technology could enable types of information sharing that the DOJ’s old guidance never envisioned, she said.
Mekki’s comments and the date range of the established rules (between 1993 and 2011) naturally lead to questions about just how widespread this “information sharing” has become. She did say that the DOJ will be paying attention to less concentrated markets where “information exchanges” can now be persistent and harmful to the economy
Last year the DOJ fined a group of major poultry producers $84.8 million. More significantly, it ordered an end to the exchange of compensation information, banned the data firm (and its president) from information-sharing in any industry, and prohibited deceptive conduct towards chicken growers that lowers their compensation. Neither the poultry groups nor the data consulting firm admitted liability.
Agri Stats is another nationally utilized data and analytics firm for the meat processing industry and it has been named in more than 90 lawsuits since 2016 for using the technology to fix prices.
How about in real estate, where Americans spend more than 30 percent of their income on rent? According to a January Moody’s report, the US is now officially a rent-burdened nation:
The national average rent-to-income (RTI) reached 30% for the first time in our 20+ years of tracking history, up 1.5% from year-ago or 0.2% from Q3, keeping the growth rate constant throughout the second half of last year.
Rising mortgage rates caused many households to be priced out from home buying and would-be buyers to remain renters. Apartment demand surged as a result and drove rates sky high. As the disparity between rent growth and income growth widens, American’s wallets feel financial distress as wage growth trails rent growth.
How did that happen? Wall Street’s takeover of the American rental market really took off during Obama’s foreclosure regime as the firms snapped up properties (including from many small landlords) at bargain prices. The pace has continued to accelerate, and more “innovative” tools are being used by the investment goliaths. Private equity and hedge fund firms use computer algorithms to find houses that would be profitable to turn into rental properties, often snapping them up with cash bids within minutes of a property coming onto the market. And when areas no longer have affordable houses to buy, they can raise rents.
It’s now coming to light that these investment behemoths might also be using algorithms to essentially act as one national landlord cartel that coordinates pricing. The lawsuits keep rolling in against real estate rental giants and the information-sharing company that connects them all. The DOJ is also investigating the companies accused of colluding to keep apartments vacant and rents sky high. From one of the lawsuits:
Beginning in approximately 2016, and potentially earlier, Lessors replaced their independent pricing and supply decisions with collusion. Lessors agreed to use a common third party that collected real-time pricing and supply levels, and then used that data to make unit-specific pricing and supply recommendations. Lessors also agreed to follow these recommendations, on the expectation that competing Lessors would do the same.
There have been multiple suits filed in Washington, proposed class actions in California and Texas. Now lawsuits are popping up in Tennessee, Colorado, Massachusetts, Florida, New Mexico, Arizona, and Texas. RealPage also has offices in India, Spain, the Philippines, Columbia, and England.
RealPage and the group of landlords are trying to get all the cases combined in Northern Texas federal court, which is a more favorable venue for corporate defendants. The lawsuits allege that the companies engaged in anti-competitiveness by violating Section One of the Sherman Antitrust Act, which “sets forth the basic antitrust prohibition against contracts, combinations, and conspiracies in restraint of trade or commerce.”
One of RealPage’s software tactics is also keeping units off the market in order to drive up prices. From the lawsuit:
RealPage allows participating Lessors to coordinate supply levels to avoid price competition. In a competitive market, there are periods where supply exceeds demand, and that in turn puts downward pressure on market prices as firms compete to attract lessees. To avoid the consequences of lawful competition, RealPage provides Lessors with information sufficient to “stagger” lease renewals to avoid oversupply. Lessors thus held vacant rental units unoccupied for periods of time (rejecting the historical adage to keep the “heads in the beds”) to ensure that, collectively, there is not one period in which the market faces an oversupply of residential real estate properties for lease, keeping prices higher.
How it’s supposed to work or used to anyways, is that when occupancy dropped, rents would also drop so that properties would be full. Companies would typically aim for occupancy rates around 97-98 percent, and lower rents would mean more “heads in beds.” But the YieldStar software allows property owners to keep prices high even during periods of high vacancy, since they are all using YieldStar software to set rent prices and keep them high. Here’s more from The Real Deal:
“You’d call up the competition in the area. Sometimes there’d be a list of 10 people to call,” says a confidential witness in the Cherry suit, who used to work for Greystar in Seattle. “You’d ask what they are charging for their apartments. Then you’d literally change the prices right there on RealPage. Manually bump it up.”
“It was price-fixing … what else can you call it when you’re literally calling your competition and changing your rate based on what they say?”
As this video from RealPage highlights, the goal is to “think big.” And that they did. The company’s 2020 annual report says it represented more than 30,000 clients (including each of the ten largest multifamily property management companies in the country) controlling about 19.7 million rental units across the US.
The lawsuits are shedding light on private equity-controlled real estate’s role in the scandal, due to their eager adoption of the YieldStar technology. Here are some of real estate goliaths named in the lawsuits:
- Greystar: The nation’s largest property management firm with nearly 794,000 multifamily units and student beds under management. In December, it was nominated for six(!) 2022 Private Equity Real Estate Awards.
- Trammell Crow Company, headquartered in Dallas, is a subsidiary of CBRE Group, the world’s largest commercial real estate services and investment firm.
- Lincoln Property Co. Manages or leases over 403 million square feet across the US.
- FPI Management. Currently manages just over 155,000 units in 18 states.
- Avenue5 manages $22 billion in multifamily and single-family assets nationwide.
- Equity Residential, the 5th largest owner of apartments in the United States, primarily in Southern California, San Francisco, Washington, D.C., New York City, Boston, Seattle, Denver, Atlanta, Dallas/Ft. Worth, and Austin.
- Mid-America Apartment Communities, which as of June 30, 2022, owns or has ownership interest in 101,229 homes in 16 states throughout the Southeast, Southwest, and Mid-Atlantic regions.
- Essex Property Trust (62,000 units). This fully integrated real estate investment trust (REIT) acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets on the west coast. From its 2022 investor presentation:
With approximately 80% of Essex’s properties within ~5 miles of another site, Essex is uniquely positioned to operate collections of properties as a centralized business unit. Leveraging proprietary technology and significant scale, Essex can operate apartment buildings more efficiently.
- Thrive Community Management (18,700 units in Washington and Oregon). Refers to employees as “thrivers.”
- AvalonBay Communities, Inc. As of September 30, 2022, the Company owned or held a direct or indirect ownership interest in 293 apartment communities containing 88,405 apartment homes in 12 states and DC.
- Cushman & Wakefield, with a portfolio of 172,000 units.
- Security Properties portfolio reflects interests in 113 assets encompassing nearly 22,354 multifamily housing units.
Private equity and hedge funds have been the main driver behind RealPage’s growth in recent years, according to ProPublica:
RealPage’s influence was burgeoning. [In 2017], the firm’s target market—multifamily buildings with five or more units—made up about 19 million of the nation’s 45 million rental units. A growing share of those buildings were owned by firms backed by Wall Street investors, who were among the most eager adopters of pricing software.
…Somewhere around 2016, according to one trade group, the industry’s use of the pricing software began to achieve “critical mass.”
Enough properties were now using RealPage’s services, that its pricing algorithm began to take full effect. Since property managers do not have to worry about being undercut by competitors, they can increase profits while even if they’re housing fewer people, which means they don’t have to worry about evicting families who can’t afford higher rent. If the apartment sits vacant for a while, so be it; eventually they’ll find someone who can afford the higher rent.
The time frame for RealPage’s takeoff coincides with astronomical rental price growth and a resurgence in homelessness numbers, as well as an uptick in the number of homeless deaths. Let’s remember that 40-50 percent of people experiencing homelessness are employed and yet simply cannot afford shelter. One can only imagine the effect if these innovative technologies to fix prices and wages were put to use in even more industries (if they aren’t already).
Private equity firms are also pouring into private student housing complexes, which they believe will provide better returns compared with other residential assets. Dormitory rates often reset every year which means prices can go up annually and if students have trouble affording the higher prices, well here’s some financial aid.
While the DOJ is investigating RealPage, it remains to be seen if they do anything more than in 2017, when it failed to do anything about the company’s nascent technology and acquisition of a rival. According to ProPublica, DOJ staff flagged the merger of RealPage and its largest competitor, Rainmaker Group, in 2017, but they were overruled by Trump appointees who chose not to challenge the merger in court.
We’ll see if the DOJ does anything more than cost-of-doing-business fines. Remember that one of RealPage’s pricing software’s main architects is Jeffery Roper who was Alaska Airlines’ Director of Revenue Management when it and other airlines began using common software to share nonpublic planned routes and prices with each other in a price fixing scandal that resulted in overcharging consumers by up to $2 billion. But Roper and other airline executives faced no punishment. In 1994, Clinton’s Justice Department negotiated a settlement with the companies that involved no jail time, fines, or consumer refunds (however, some affected consumers received 10 percent discount coupons for future travel as part of a private lawsuit).
Roper, the architect of RealPage’s software whose name appears in multiple lawsuits against the company, allegedly stated that the software was meant to circumvent landlords who had “way too much empathy” and hesitated to push rents higher.
Gee, I wonder why there is a so called ‘housing crisis’.. and why millions are homeless, or nearly there.
Oh, and let’s not forget Air-B-& B landlords..
According to the Census bureau, the vacancy rate of housing in the US is around 10%.
Annual vacancy rates, 2015 – 2021:
These are for many reasons. Wolf estimates in the article that about 6-7% is shadow inventory.
You forgot 2009, ’10, ’11 to ‘2014, not coincidentally the 0% interest Obama years and housing giveaway, er theft by and for these same above interests. Also, not surprisingly, the same time frame of exploding housing/rent prices and people without hones.
Plus the 2 A’s and B.
Where are our hackers!? Are they but serfs serving others, the commercial criminals lining their pockets while they can? The monopoly/monopsony helper programs described in this post seem a tasty treat for any self-respecting hacker! But where have all the hackers gone?????
Reading this post, my stomach bothers me, a lot. Are there no true Hackers we can call upon in our dire need!? — to echo a similar query from a movie I have watched many times — “Cloud Atlas”.
Could anyone in the NC commentariat please enlighten me as to why so many of my liberal friends still worship at the shrine of St. Obama and consign me to the outer darkness for daring to utter any heretical observation about the metrics of his reign?
Here’s my explanation: During the Obama years, those liberal friends prospered. And, since times were good for them, they have no reason to question the wonderfulness of St. Obama.
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith, Wealth of Nations
Same as it ever was …