The streets of San Francisco may be known for Dirty Harry, movie car chases, and the birth of the hippie movement, but they will no longer be associated with rental price-setting software. That’s because the Golden Gate City is in line to be the first in the U.S. to ban the tech tools associated with landlord price fixing.
The San Francisco Board of Supervisors unanimously approved an ordinance introduced by its supervisor and mayoral hopeful Aaron Peskin that bans landlords from using specific software and algorithms to set rents. The measure will still need to be approved by the mayor next month before it can be enforced.
The best-known software companies affected by the legislation will be RealPage and Yardi, which are used by landlords nationwide. These companies have stoked controversy, lawsuits, and a DOJ investigation for allegedly fueling the rampant rent rise.
According to Peskin’s office, the new legislation bans both the sale and use of software “which combines non-public competitor data to set, recommend, or advise on rents and occupancy levels.” The measure also allows the City Attorney or tenants affected by the software to file lawsuits.
The Extent of California’s Housing Crisis
Nowhere has the housing crisis been more prevalent than in California, one of the most rent-burdened states in the country, where renters make up 44% of households. Rent control advocates have been involved in a contentious battle to repeal the Costa-Hawkins Rental Housing Act, a 1995 law prohibiting communities from rent controls on single-family homes and any housing built after Feb. 1, 1995.
It is widely believed that price-setting software has fueled inflated rental prices, contributing to the affordability crisis sweeping the nation. Peskin referred to such software as “automated price-fixing” and said the ban would “allow the market to work and bring down rents in San Francisco.” He also claimed in a meeting that “Wall Street has gotten into the housing business, and it’s a phenomenon we have seen here locally.”
Peskin Accuses Landlords of Keeping Units Intentionally Vacant
Peskin continued:
“We want to put more units on the market. Let’s be clear: RealPage has exacerbated our rent crisis and empowered corporate landlords to intentionally keep units vacant. So we’re taking action locally to ensure our working renters can afford to live here.”
Attorney Lee Hepner of the American Economic Liberties Project told CBS News’ John Ramos: “What they’re doing—their entire business model—is illegal. They are manipulating the market to fix prices and hike rents and remove really healthy competition from markets that should be responding to that competitive pressure and actually bring rents down.”
Dramatic Rent Increases and Tenant Harassment
RealPage responded in a statement to CBS News Bay Area on July 17, adhering to its often-used argument that media reports are misleading and that their software “contributes to a healthier and more efficient rental housing ecosystem.”
According to Lenea Maibaum, a tenant organizer for the Housing Rights Committee and a member of the Veritas Tenants Association, RealPage and Yardi most obviously work with corporate landlords who own dozens to thousands of units and have used various techniques to increase landlords’ profits.
Maibaum told kqed.org:
“Tenants experience the effects of RealPage in the form of rent hikes, miscellaneous fees to get around rent control, and arbitrary evictions. It’s a dangerous tool in the hands of well-resourced corporate landlords. Since Veritas, then Brookfield (Properties), took over my apartment building and the management of thousands of other rental units in San Francisco, we’ve noticed dramatic increases in rent for new tenants and new tactics to harass and displace long-term tenants.”
How Mom-and-Pop Landlords Can Use Algorithmic Pricing to Attract More Tenants
RealPage software is used to set rental prices on 4.5 million housing units in the U.S. However, the current lawsuits refer to the company as representing corporate landlords—in essence, anyone with a corporation is a corporate landlord.
Analytics site enlyft.com says 71% of RealPage’s clients are small landlords with under 50 employees. This means that the company’s potential reach touches vast swathes of the U.S. rental market.
Even mom-and-pop landlords, who represent nearly 46% of the rental market with one to four units, are not immune to RealPage’s influence. That’s because when a landlord looks at nearby properties for rent on sites such as apartments.com to see what the competition is charging, they will probably see other landlords who use RealPage.
However, many of these landlords and property management companies represent larger apartment buildings, often ones that offer amenities such as a gym, pool, and lounge.
With my own rentals, I’ve found that many tenants would rather pay less rent and do without the amenities. They’d rather join a gym of their choice and socialize outside their living space. This is an advantage for mom-and-pop landlords like me. By charging less than the RealPage algorithm dictates, there’s a pool of tenants who don’t want an algorithm to dictate their rental price, preferring a fairer price without the extras.
Final Thoughts
RealPage and Yardi are not the only players in town—there are many alternatives. However, in a data-centric world, algorithmic pricing, which occurs in multiple industries, would inevitably creep into real estate, too.
Property management software is a huge business, worth over $25 billion today and estimated to reach over $32 billion by 2028. Landlords want a return on their pricey software management overheads, not to mention the spiraling cost of upkeep of their buildings. However, what most of these algorithms do not factor into their complex equations are the socioeconomic factors affecting tenants looking for a place to live, which is becoming increasingly unaffordable.
Assuming you are not renting to Section 8 tenants, pricing your rentals beneath an escalating market but maintaining them in excellent condition is a way to keep your rentals full for longer, without high tenant turnover—and ultimately beat the algorithm at its own game.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
