Mid-America Renters Case
The Crone Law Firm believes that Mid-America and other major apartment management companies may have used a third-party app (using an agreed upon algorithm) to illegally fix prices at a higher level than the market would ordinarily dictate. As a result, we are seeking to redress that wrong against Mid-America and believe you may be entitled to compensation as a former tenant.
The attorney for this case, Bill Walk.
Case Summary:
Until approximately 2016 and potentially earlier, the nation’s largest residential apartment owners (Lessors), including Mid-America Apartment Communities, Inc. in Germantown, TN (hereinafter “MAA”), used their own assessments of how best to compete against other apartments owners. Prior to 2016, apartment owners typically priced their apartment rental units competitively to get top revenues by maximizing physical occupancy, i.e., maximizing the percentage of apartments that were occupied by paying tenants. Apartment owner had an incentive to lower their prices to attract lessees (renters) away from competitors until all available apartments were rented.
In this manner, market competition drove rental rates to reflect the supply of rental units and tenant lessees’ demand. Owners also independently determined when to put their apartment rentals on the market, resulting in unpredictable supply levels – a natural phenomenon in a competitive market. When supply exceeded demand, owners cut rental prices.
As explained by Donald Davidoff, a primary developer of software we are challenging, apartment owners face a ‘classic prisoners’ dilemma.” Since residential real estate is a perishable resource (i.e., if a unit is unoccupied for a month, the owner can never monetize that lost month of rent), apartment owners favored a strategy of keeping “heads in the beds,” a term for offering attractive lease pricing to maximize physical occupancy levels in residential apartments. Thus, Davidoff explained, while all owners collectively” would be better off limiting their rent (price) reduction,” if any owner
individually “lower(ed) their rents while the others don’t, then that (individual Lessor) would outperform” vis-à-vis their competitors. In the absence of assurances that all apartment owners would be limiting their rental price reductions, then, the prisoner’s dilemma dictated that the prudent course was to reduce price and compete for market share.
However, on or about approximately 2016, MAA and other nationwide apartment owners replaced their independent rental pricing and supply decisions with collusive behavior. They agreed to use a common third party that collected competitively sensitive real-time pricing and supply leve
ls from them, and then used that data to make unit-specific pricing and supply recommendations to owners. The owners agreed to follow these recommendations with the understanding that competing apartment owners would do the same. That unnamed third party is RealPage, Inc. (‘RealPage’).
Realpage provided software and data analytics to MAA and its competing apartment owners. RealPage also serves as the mechanism by which Mid-America Apartment Communities and the other apartment owners collude and avoid competition, increasing lease prices to renters in Tennessee. RealPage openly boasts that its algorithmic pricing services “balance supply and demand to maximize (Lessors’) revenue growth.” And that is precisely what RealPage has done, facilitating an agreement among MAA and other participating owners not to compete on apartment rental rates, and allowing them to coordinate both pricing and apartment availability. They accomplished their agreed purpose of avoiding price competition for apartment rentals in the State of Tennessee.
MAA and other apartment owners in Tennessee “outsource daily pricing and ongoing revenue oversight to RealPage – collapsing separate centers of independent decision-making into one. RealPage collects up-to-the-minute data on the historical and contemporaneous pricing of rental units from participating owners.
According to RealPage, this data is updated “every time (Lessors) make or change a (lease) renewal offer,” spanning over “16 million units,” which is a “very large chunk of the total inventory in the country.” RealPage standardizes this data to account for differences in characteristics or “class” of the property in question. It then runs this dataset through its pricing algorithm, whereby RealPage and its “Pricing Advisors” set rental prices for MAA and participating owners through application of this common formula.
RealPage asserts that it sets pricing for participating owners’ “properties as though we own them ourselves” – i.e., MAA and the participating owners’ replicates market outcomes one would observe if they were a single seller or a monopolist of residential leases.
RealPage Pricing Advisors are central to RealPage, MAA, and the owners’ ability to achieve centralized, coordinated rental rates. RealPage directly employs Pricing Advisors who are assigned to Lessors and integrated into the owners’ price setting process. These Advisors are involved in setting baseline rules for how the common algorithm functions, viewing the outputs of the algorithm, finalizing pricing decisions for the owners, and providing guidance on adhering to RealPage’s price-setting system.
The Pricing Advisors are assigned to groups of competing owners operating in a geographic area or city; put another way, multiple competing owners are outsourcing their pricing functions to the same agreed upon algorithm, with the algorithm’s output interpreted by the same individual human being (the Pricing Adviser), mimicking a monopoly outcome.
While these Pricing Advisors are assigned to oversee pricing for a particular group of competing owners in a specific geographic area or city, RealPage ensures that their focus and goals remain raising rents across that area or city as a whole as opposed to for owners on an individualized basis.
In fact, RealPage directly ties compensation of its Pricing Advisors to whether they have been successful in raising rents across their assigned area or city overall – not to their ability to meet revenue goals for their assigned competing owners. Pricing Advisors accordingly aim to raise rental prices across their assigned group of competing owners as well as the prices of other competing owners, assigned to other pricing Advisors, but located in the same area or city.
To accomplish this goal Pricing Advisors routinely coordinate with one another and share forward-looking pricing plans, ultimately inflating rental rates for all competing owners within a given region or city and establishing “an artificial floor” for RealPage’s provided rental prices.
While owners may reject the RealPage pricing, it is an onerous process. RealPage emphasizes the need for “discipline” among participating owners. To encourage adherence to its common scheme, RealPage explains that for its services to be most effective in increasing rents, owners must accept the pricing at least eighty (80%) percent of the time. RealPage also directly incentivizes each Pricing Advisor, through its compensation structure, to push owners to follow RealPage pricing and maintain higher prices across their assigned submarket.
These efforts are successful, with Ryan Kimura, a former RealPage executive, explaining that as many as ninety (90) percent (and at least eighty 80%) of prices are accepted by participating owners. A former executive of one of the companies that originally developed the revenue management software explained that RealPage’s pricing decisions were “rarely overwritten.”
Simply put, and as a representative of owner ECI Group, Emily Mask, explains, while “we (Lessors) are all technically competitors,” RealPage “helps us (Lessors) work together,” “to work with a community pricing strategy, not to work separately.”
RealPage also allows its owners to coordinate supply levels to avoid price competition on apartment rental rates. In a competitive market, there are periods where supply exceeds demand, and that in turn puts downward pressure on market rental rates as firms compete to attract lessees. To avoid the consequences of this normal competition, RealPage provides owners with information sufficient to “stagger” lease renewals to avoid oversupply. Owners thus hold 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 apartments for lease, keeping prices higher.
By staggering apartment lease renewals to artificially smooth out natural imbalances of supply and demand, RealPage and participating owners, including MAA, also eliminate any incentive to undercut or cheat on the common scheme (avoiding a race to the bottom, or the “prisoner’s dilemma”). This is the central mantra of RealPage, to sacrifice “physical” occupancy (i.e., to decrease output) in exchange for “economic” occupancy, a term created by RealPage to refer to increasing prices and decreasing physical occupancy levels (output) in the market for residential apartments.
MAA’s and RealPage’s participating owners’ joint efforts were effective at achieving their unlawful outcomes: higher rental prices and lower physical occupancy levels (output). RealPage boosts that participating owner experience “rental rate improvements, year over year, between 5% and 12% in every market.” The CEO of apartment Camden, Ric Campo, has said that the net effect of raising rents and ‘pushing people out” of the residential real estate leases which they could no longer afford, was “$10 million in income.”
RealPage is proud of its role in the exploding increase in the prices of residential apartment leases. In a marketing video used to attract new owners to its organization, a RealPage Vice President, Jay Parsons, discussed the recent and unprecedented price increases for residential leases, as high as 14.50% in some markets. When he went on to ask another RealPage executive: “What role has the (RealPage) software played” in those unprecedented rental price increases, that RealPage executive, Andrew Bowen, Vice President of Investor Markets, responded: “I think it’s driving it, quite honestly.”
In a confidential interview, however, a former RealPage employee who was directly
Involved in the creation of the original algorithmic software, has expressed his dismay with the way RealPage has enabled owners to collectively raise rents at this rapid pace. This collusive behavior has in turn placed massive pressure on renters’ efforts to keep roofs over their heads. An early developer of RealPage’s pricing software reflected that “these optimization systems are really efficient at extracting value and they will push things (as far as they can) until they start to break.”
If left unchecked, RealPage and its participating owners’ cartel (including Defendant MAA) stand to ruin with ever increasing rental rates the multifamily residential apartment lease market and continue to exacerbate the affordable housing crisis in Tennessee and in this Nation. The cartel which Plaintiffs challenge is unlawful under Tennessee Antitrust Act. Plaintiffs bring this action to recover damages, as well as injunctive and other appropriate relief on behalf of Tennessee Class Members.
Academics have widely documented, with both theoretical literature and empirical examples, that use of pricing algorithms by competitors in a market leads to elevated prices which in turn harms consumers. Government regulators have also described in detail the concerns raised by this type of algorithmic pricing. Maureen Ohlhausen, when serving as acting Chairperson of the Federal Trade Commission, described how industry-wide usage of a shared algorithm is the type of agreement prohibited by antitrust law: “Imagine a group of competitors sub-contracting their pricing decisions to a common, outside agent that provides algorithmic pricing services.
Each firm communicates its pricing strategy to the vendor, and the vendor then programs its algorithm to reflect the firm’s pricing strategy. But because the same outside vendor now has confidential price strategy information from multiple competitors, it can program its algorithm to maximize industry-wide pricing. In effect, the firms themselves do not directly share their pricing strategies, but that information still ends up in common hands, and that shared information is then used to maximize market-wide prices.
Again, this is familiar territory for antitrust lawyers, and we even have an old-fashioned term for it, the hub-and-spoke conspiracy.”
Mid-America Apartment Communities and other apartment owners have agreed to adopt algorithmic pricing for apartments among themselves. They also have agreed to exchange apartment availability data to keep the supply of available apartments limited so they can avoid price competition and concessions to renters. This exchange of confidential, private business data is not normal in a competitive market. MAA and the other owners are acting in lockstep as a cartel would act.
You, as a renter, are paying higher rents as a result and there is no hope for competition on rental rates as long as this continues. Our class action lawsuit will change this outcome and keep rental rates reasonable and subject to competitive pressures.