Late last month, the U.S. Department of Justice and several state attorneys general sued RealPage Inc., claiming the pricing algorithm used in its software violates federal antitrust laws.
The Richardson, Texas-based real estate software company in response said it believed the claims brought by DOJ were “devoid of merit,” adding that the company “intend[s] to vigorously defend ourselves against these accusations.”
Experts say the litigation is likely to take some time to reach a resolution, whether by settlement or through a trial. But the claims laid out in the DOJ’s allegations prompt bigger questions about the role of technology in common real estate practices such as lease negotiations.
At the heart of the DOJ’s claims is that apartment owners share information that’s not publicly available with RealPage’s software, which inputs that information into an algorithm to suggest lease rates to other users of that software — and industry competitors. That, according to Attorney General Merrick Garland, “enables landlords to share confidential, competitively sensitive information and align their rents,” which the DOJ alleges is a violation of the Sherman Antitrust Act.
But that law — established in 1890 to prescribe free competition among businesses and prohibit monopolies — obviously didn’t contemplate the role of technology in business practices, experts say.
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Beyond RealPage and the apartment industry, the DOJ under the Biden administration has been going after the use of artificial intelligence and algorithms in many services and industries, said Abiel Garcia, a partner at law firm Kesselman, Brantly & Stockinger LLP, who specializes in antitrust matters.
In early 2023, for example, the DOJ filed an antitrust suit against Google LLC, claiming the company monopolized digital advertising technology products in violation of the Sherman Act. In a win for the federal government, a judge last month ruled Google violated antitrust law and has an illegal monopoly on the search-engine industry.
“We’re going to be seeing a lot more of this,” Garcia said. “It’s very much on the radar of not just the administration, but the states themselves.”
While several class-action lawsuits have been brought against RealPage in recent years — cases that also allege collusion and price fixing because of the company’s algorithmic software — the DOJ has investigatory powers that other parties don’t. That ups the ante in the DOJ’s case beyond the class-action cases, Garcia said.
One key difference, though: Only RealPage is named in the DOJ’s suit, whereas some of the class-action cases have named specific landlords in their allegations of collusion and price fixing. Garcia said it’s possible landlords could be added to the DOJ case at a later time.
Jerrold Bregman, a partner at BG Law who specializes in commercial real estate, corporate and business transactions matters, said the RealPage case is the first major example of this type of antitrust litigation within commercial real estate, although there are now several similar examples across other industries.
The role of technology as it relates to the Sherman Act and antitrust claims more broadly is still being tested, he said.
“This is all so new,” Bregman said. “Artificial intelligence is powering these algorithms and enabling this process, which separate individuals from the actions. It’s machine learning and dictation, and [according to the lawuit] allows collusive practices without the discussion. It hasn’t been seen in commercial real estate, but I think this is indicative of the times that we’re in.”
Because the Sherman Act and other laws around anticompetitive behavior were established before the onset of much of modern-day technology, they don’t contemplate the idea of machines talking to one another to create an outcome, such as price fixing.
The allegations aren’t limited to RealPage or apartment rents, either. Industries like hotels and airlines also have contended with price-fixing allegations because of algorithms and technology, Bregman said.
“We are in the heyday of the Wild West of this technology-fueled anticompetitive conduct,” he said. “To see it in [the real estate] industry is interesting and inevitable. Ultimately, it’s a tradeoff between trying to regulate the market in a way that’s fair without creating distortions in the market that aren’t desirable.”
Ripple effects for real estate industry
The impact of the lawsuits against RealPage on the apartment sector and commercial real estate more broadly remains to be seen.
Experts say a settlement could be reached in which RealPage agrees to change some of the ways in which its software operates.
In the suit, the DOJ claims RealPage’s software in question — AI Revenue Management and YieldStar — is designed to make it easier to accept recommended lease rates than to decline them through an auto-accept function. For example, the lawsuit says, a manager can choose to do a bulk acceptance — accepting multiple floorplan recommendations all at once — but cannot do the same when rejecting a recommendation.
But even if some incremental changes to the software are made, Bregman said that still may not satisfy the overarching concern of the DOJ, which is the ability to share highly sensitive, confidential information.
“That’s their value-add, to give further insight into the market,” Bregman said. “There’s a lot of publicly available information they can attain … but this next level, of taking highly sensitive information, including rent concessions and vacancy rates, and putting all of that together to determine what the recommended rate should be: That’s entirely new, and that’s the business model.”
Even if there are changes to how much information landlords who use RealPage’s software can access, the impact of those changes is likely to be marginal, Bregman said. Many landlords already have access to market rental prices through public information. Vacancy rates and concessions of competing properties have generally been more opaque.
Looking across the commercial real estate industry, it’s possible other aspects of the market will be disrupted because of similar concerns and allegations laid out against RealPage.
Bregman said one possibility is property maintenance, with AI determining pricing for things like snow removal, irrigation, plumbing or electrical services.
But so much of real estate dealings are local, with RealPage and the claims brought up against the National Association of Realtors — which resulted in a $1.78 billion jury verdict last fall and a $418 million settlement earlier this year by the NAR — being unique national exceptions to that rule, said David Tarter, a longtime real estate attorney and executive director for the Center for Real Estate Entrepreneurship at George Mason University‘s Costello College of Business.
“I think those are the kind of activities that raise the eyebrows of the federal government,” Tarter said. “[The NAR case] was essentially an anticompetitive behavior [claim] because the marketplace set commissions and there’s no real competition on commission. But there’s not much of that in real estate. A lot of it is hyperlocal.”
The use of big data and analytics will inevitably increase within real estate, Tarter said, but a big distinction is whether it’s private or public information that’s being used for analysis.
Political pressure around housing affordability
The allegations against RealPage come in the wake of rapid rental-rate appreciation during the Covid-19 pandemic.
Despite a recent slowdown in the national apartment market, median monthly rent across the U.S. this spring was still just $33 less than what it was at market’s peak in August 2022, Realtor.com found. It also was $316 higher (22.5%) than what it was at the same time in 2019.
Tarter said those rapidly rising prices and the crunch facing many people renting households today could be part of the reason why RealPage’s software is under the microscope.
“Certainly, the government is trying to address a real societal issue,” he said. “Ultimately, it comes down to the facts and the court. That will determine where this thing ends up.”
He added that cases like these frequently end up in a settlement, although it’s too early to predict what the outcome might be.
Whether the case gets settled or ends up in a trial, the outcome of this and other antitrust cases will better define the federal government’s limits on the role of big data in business matters, Tarter said.
The claims laid out in the case against RealPage and other similar antitrust cases also are creating pressure for lawmakers to either change current laws to better regulate technology in everyday business practices or create new ones. Earlier this year, U.S. Sen. Amy Klobuchar (D-Minn.) reintroduced the Competition and Antitrust Law Enforcement Reform Act, which would give federal enforcers additional resources, strengthen prohibitions on anticompetitive conduct and mergers, and make additional reforms to enforcement.
Ultimately, the cases at hand are a classic dichotomy between the interests of the consumer and of business, Bregman said.
“There will be a reckoning,” he said. “I don’t know if it will happen in the near or long term, but I think the fact this [RealPage] lawsuit is pending, and the kinds of claims they’re bringing, is a shot across the bow, a bellwether action by the DOJ to express it’s going to be taking seriously this machine learning and what it views as anticompetitive information sharing. The consequences could be very far reaching, including in real estate and beyond.”
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