SF could be first city to ban rent-setting algorithms

We all know rents are crazy high, and we all know there are a lot of reasons for that, including speculation, greed, economic inequality, lack of affordable housing, rent control restrictions — but also, it turns out, an algorithm.

ProPublica reporters spent months on an in-depth investigation in 2022, revealing how a company called RealPage allegedly helped landlords conspired to prevent apartments from selling and set rents artificially high:

The way the software works and its growing reach have led real estate and legal experts to question whether RealPage has created a new type of cartel that allows the nation’s largest property owners to indirectly coordinate prices, potentially violating federal law.

Experts say RealPage and its clients are exposing themselves to antitrust scrutiny for several reasons, including their use of private data on how much competitors charge for rent. In particular, RealPage’s formation of working groups that meet privately and include landlords who are otherwise rivals could be a red flag of potential collusion, a former federal prosecutor said.

Critics say the software algorithm could, at a minimum, artificially inflate rental prices and stifle competition.

RealPage is being sued. State officials across the country are investigating. Four U.S. senators, including Elizabeth Warren and Bernie Sanders, wrote to the company’s CEO:

Rents have risen 20 percent nationwide since 2020, deepening an already dire housing crisis. While the primary cause of the housing crisis is the shortage of nearly seven million units of public housing, private equity firms and other institutional investors have taken advantage of these conditions and added fuel to the fire under American renters. In recent years, their increased involvement in the housing market has resulted in a dramatic number of evictions and exorbitant rent increases for their tenants. Now, new reports indicate that your company is creating tools to push public housing even further out of reach for families by “artificially inflating rents and stifling competition,” creating a race to the top for rent increases. …

YieldStar’s recommendation that landlords keep units empty when tenants can’t pay the asking price undermines efforts to ensure that the housing market is fair and free from discrimination. Keeping rental prices artificially high predictably and disproportionately harms lower-income tenants, tenants of color, female-headed households, and people with disabilities. It also undermines efforts to increase housing affordability by increasing the supply of housing: Zoning reforms and federal investments to increase the supply of housing will not lower rents if landlords collude using algorithms to keep new units empty.

The software allows landlords to see almost immediately what rent other landlords are charging, and critics say it encourages them to collectively raise prices so that no one undercuts the other. If tenants can’t or won’t pay the higher rent, the software encourages landlords to hold off on selling their apartments.

It is this type of behavior that was the basis of federal and state antitrust laws written more than 100 years ago.

But so far, Congress has not banned the activity, the Justice Department has not shut down RealPages, and no state has outlawed the software.

San Francisco could be first.

Superintendents Aaron Peskin and Connie Chan have introduced a bill that would “prohibit the sale or use of ‘algorithmic devices’ to set, recommend, or advise on rent or occupancy levels for residential units in San Francisco.”

As Peskin told me, that’s up to local government. “This is the single most important, fastest thing the city can do right now to make San Francisco more affordable,” he said.

So RealPage is fighting back – because if San Francisco can regulate this software, so can Berkeley, Oakland, Los Angeles, Chicago, New York, Philadelphia… the list goes on.

San Francisco was the first to regulate Airbnb, and that model of local control has spread. Rent-fixing is a lucrative business, and RealPage has hired a lobbying firm to try to block supers from passing the bill (and perhaps from signing it by the mayor).

The company is represented by Theo Ellington of Strategies360, whom the SF Standard recently called a “local activist.” In a detailed letter to the supers, he argues that media reports and investigations are greatly exaggerated because RealPage only suggests and does not set anyone’s rent:

RealPage clients make decisions about their unique strategies and set the parameters for pricing recommendations. RealPage revenue management software then provides clients with personalized pricing recommendations based on their unique strategies and property histories.

That’s not what RealPage executives are saying. From ProPublica:

“We’ve never seen numbers like this before,” Jay Parsons, vice president of RealPage, said as conventioneers walked past. Apartment rents have recently risen as much as 14.5%, he said in a video touting the company’s services. Turning to his colleague, Parsons asked: What role did software play?

“I think that’s the driving force, honestly,” replied Andrew Bowen, another RealPage executive. “As a property manager, there are very few of us who would be willing to raise rents by double digits in a single month, doing it manually.”

So far, according to public records, local property groups have been fairly quiet. But that could change.

The bill goes to the Land Use and Transportation Committee Monday/29and moves on to the full council Tuesday/30.

I wonder if anyone on the board will vote against it.