Why is rent so high? The Justice Dept. blames a tech firm’s algorithm.

The Justice Department and attorneys general from eight states are suing a Texas-based software company accused of using complex algorithms to enable widespread collusion in rents by landlords.

In a lawsuit filed Friday in the Middle District of North Carolina, federal regulators accused RealPage of an unlawful scheme to decrease competition in apartment rentals, and abusing monopoly power in its niche market for software that landlords use to price apartments.

The Justice Department’s complaint states that RealPage acknowledged that its software is aimed at maximizing profits for landlords and allowing them to avoid competing on the merits of each apartment. The complaint points to situations where the software identified tenants who may be candidates for larger rent increases, and it cited one landlord who called RealPage’s product “classic price fixing” for its use of proprietary data.

“Everybody knows the rent is too damn high, and we alleged this is one of the reasons why,” U.S. Attorney General Merrick Garland said Friday.

RealPage said it would contest the allegations and described its software as “pro-competitive technology that has been used competitively for years.” The lawsuit “is merely a distraction from the fundamental economic and political issues driving inflation throughout our economy - and housing affordability in particular,” company spokesperson Jennifer Bowcock said.

The lawsuit is among the Justice Department’s first major enforcement actions in which software is being alleged as the primary means of collusion.

“With the RealPage lawsuit, the DOJ has declared that algorithmic price fixing will be subject to the same condemnation as other price-fixing schemes,” said Roger Alford, a former Justice Department antitrust lawyer who now teaches at the University of Notre Dame.

Joining the federal lawsuit are North Carolina, California, Colorado, Connecticut, Minnesota, Oregon, Tennessee and Washington state.

The Justice Department complaint described housing as the largest budget item for many people in the United States, especially for lower-income residents. For Americans without a college degree, the percentage of income spent on rent increased from 30 percent in 2000 to 42 percent in 2017, according to statistics cited in the complaint.

Founded in 1998 and headquartered in Richardson, Tex., RealPage says it serves over 24 million real estate units worldwide. According to the Justice Department’s complaint, RealPage has about 80 percent of the U.S. market for commercial revenue management software. It is owned by private equity firm Thoma Bravo, which acquired it last year for about $10.1 billion, including debt.

The Justice Department alleges that RealPage works with competing landlords who share sensitive rental data used to train the company’s pricing algorithms. The software makes recommendations on rent increases and other aspects of pricing.

Users of RealPage set their own rental prices and have discretion to accept or reject software-driven recommendations, the company said. The software makes recommendations not only for higher rents, RealPage said, but also lower rents or no change at all.

But the complaint filed Friday cites a RealPage pitch to clients that describes its ability to provide access to competitors’ data as “a meaningful tool that it claims enables landlords to outperform their properties’ competitors by 2–7%.”

The Justice Department’s complaint also describes an instance in which the company told a potential client it could find ways to boost short-term rents. “As RealPage explained to one landlord, by using competitors’ data, they can identify situations where ʻwe may have a $50 increase instead of a $10 increase for that day.’”

RealPage was hit with lawsuits starting in autumn 2022, after a ProPublica investigation revealed the influence of RealPage software in setting rental prices.

Multiple state and municipal prosecutors have sued, including District of Columbia Attorney General Brian Schwalb in November 2023 and Arizona Attorney General Kris Mayes in February.

“This action sends an important signal to the market that algorithms may play a critical role in facilitating illegal collusion,” said Gene Kimmelman, a former Justice Department antitrust official. “Courts must factor new technology into their assessment of illegal behavior.”

The Justice Department case, which has been anticipated for months, is only filed against RealPage, not landlords. Some legal scholars have pushed back on the idea that a company has enabled collusion simply because it happens to be a vendor used by many competitors who don’t actually work together.

Jay Ezrielev, founder of antitrust consulting firm Elevecon, has argued that the Justice Department’s case against RealPage “represents a vast expansion of antitrust doctrine” and could stifle economic growth.

“Such a low threshold for establishing liability poses significant and imminent antitrust risks for a significant share of U.S. commerce,” Ezrielev wrote earlier this month.