This Company’s AI Algorithm is why US House Rents are Going Up

RealPage's YieldStar software is changing the rental game all over United States

A rental algorithm known as YieldStar, which takes the human element out of housing and raises prices on behalf of landlords — a useful tool for real estate owners but a dystopian and never-ending nightmare for tenants — has contributed to the nationwide rise in rents.

RealPage's YieldStar software, which is based in Texas, helps landlords set apartment prices across the United States. With rents rising, critics worry that the company's rental algorithm hurts competition.

RealPage stated in materials on its website that the nation's largest property management company, Greystar, discovered that its buildings using YieldStar outperformed their markets by 4.8% even during one downturn, a significant premium over competitors. Tens of thousands of apartments are priced by Greystar using RealPage software.

According to a ProPublica investigation, RealPage's influence over apartment prices significantly increased after federal regulators approved a contentious merger in 2017, making it the nation's dominant provider of such rent-setting software. The move enabled the Texas-based company to surpass 31,700 customers for its range of real estate technology services.

Rents for one-bedroom apartments have continued to rise in 46 of the 47 states examined in the United States between September 2021 and September 2022, according to recent data. There were increases of at least 8% in half of those states.

Although RealPage has been in business since 1998 and is far from the only rent-setting software on the market, a contentious merger in 2017 between the company and one of its rivals resulted in its customers controlling 19.7 million of the 45 million rental units in the United States by 2020.

To put it another way, the prices of nearly half of all rental units across the nation were influenced by an algorithm. Worryingly, very little is known about how the YieldStar algorithm works in detail. To put it mildly, even the little we know about it is troubling. In fact, some people think that the algorithm could be illegal and hurt competition because it lets other landlords share anonymous rental price data.

In some markets, the impact is significant.

ProPublica discovered that just ten property managers used pricing software from RealPage to manage 70% of the apartments in one Seattle neighborhood.

The software uses an algorithm, which is a set of mathematical rules, to look at a lot of data that RealPage gets from customers. This data includes personal information about what competitors in the area charge.

The method of negotiating with the staff of an apartments for rent in Austin building  is disrupted for tenants by the system. RealPage advises landlords to accept a lower occupancy rate in order to raise rents and make more money, and it discourages bargaining with renters.

According to ProPublica, one of the algorithm's developers, leasing agents had "too much empathy" in comparison to computer-generated pricing.

According to former RealPage employees, apartment managers can reject the software's suggestions, but up to 90% are adopted.

Real estate and legal experts have questioned whether RealPage has created a new kind of cartel that allows the nation's largest landlords to indirectly coordinate pricing, potentially in violation of federal law, given the software's design and expanding reach.

According to experts, RealPage and its clients are subject to antitrust enforcement for a number of reasons, one of which is their use of private data regarding the rent charges of competitors. A former federal prosecutor stated that in particular, RealPage's establishment of private work groups with landlords who are otherwise adversaries could be a sign of possible collusion.

The software's algorithm may, according to critics, be artificially inflating rents and reducing competition. RealPage acknowledged that it incorporates the internal rent data of its customers into its pricing software, providing landlords with an aggregated, anonymous view of their nearby rivals' prices.

In an email, a representative of the company stated that RealPage uses aggregated market data from numerous sources in a legal manner. The company said that landlords who use employees to manually set prices usually do phone surveys to see what other landlords' rents are, which could be anti-competitive.

Conclusion

It is difficult to determine the role of RealPage's software in skyrocketing rents, which nearly doubled in some cities in the decade preceding the pandemic. An existing housing shortage has been made worse by inadequate new construction and a tight housing market.