One of the most important decisions landlords can make is what price they should charge for their space. If the price is too high the property could sit on the market, losing revenue every day that it does. But set the price too low and you risk leaving profit on the table compared to what the market would have paid. The risk of underpricing a lease in a commercial building is compounded by the fact that the value of a building is at least partially determined by its revenue, meaning a small drop in profit could mean a large drop in property value.
One of the ways that landlords have been able to derive the optimal price for their space is by using software. For multifamily buildings that software is often RealPage, whose YieldStar product can use sophisticated algorithms and proprietary data to understand the true appetite and therefore price for any given unit. While this software has been quite effective for landlords, it is getting more scrutiny from the general public for its alleged role in the unaffordability of our cities.
This week an article was published in ProPublica titled Rent Going Up? One Company’s Algorithm Could be Why. The article explains how RealPage’s YieldStar software often recommends that landlords raise rents, even during the pandemic. An unidentified developer of the algorithm that YieldStar uses went so far as to say that leasing agents had “too much empathy” compared to computer generated pricing.
The article created quite a stir, as you might expect. More and more Americans are struggling to pay rent and find themselves with few options now that higher interest rates have made mortgages more expensive. But this was not the first time that this accusation has been thrown at the software and its parent company. A few years ago I was contacted by an author named James Nelson who had recently written a book on the pricing algorithm called Stealing Home: How Artificial Intelligence is Hacking the American Dream. I interviewed Nelson about his research for the book and wrote an article about it back in October of 2020. All in all I was interested in his claims that by using the same pricing software, large landlords were acting as a cartel. But I had some doubts about this accusation that I think still rings true today.
“Cartels are created by monopolies and even in cities with a lot of large owners sharing data, their overall ownership of the rental stock is likely nothing close to a majority,” I wrote. “Large landlords also don’t control the supply of the product into the market, anyone can develop more housing—although many large landlords are certainly some of the main financiers for large developments in most cities.”
I still think that it is a stretch to call owners using the same pricing algorithm a cartel. I also don’t think that we can point to this software as the cause of our housing affordability crisis. While it might be easy to point to “big tech” as the evil puppet master for the problems of our cities, it doesn’t take into consideration all of the other forces at play. I still contend that the real source of the skyrocketing rent prices is a lack of supply. Sure, the algorithm might exploit the general lack of housing stock that has been created in most cities, but it is only the symptom and not the cause of the problem.
But no matter what I might think, this increased awareness of how landlords are pricing their units has provoked the ire of the general public about PropTech and could put it in the crosshairs of regulators. While the secrecy of products like YieldStar give it a competitive advantage over would-be competitors, the “black box” approach to these kinds of calculations makes consumers skeptical.
The ProPublica article could just be another flash in the pan caused by “gotcha” journalism. But even if nothing comes of the reaction to the editorial it does highlight a growing discontent with secretive technology that affects our daily lives. Other technology industries have already started making their decisions more transparent, sometimes even hiring third parties to certify that the algorithms don’t discriminate. PropTech companies would be smart to follow suit. Landlords should be able to lean on software to help them make one of their most important decisions but it isn’t ridiculous to think that the people affected by those decisions might want a bit more explanation. In my opinion, it is better to be transparent voluntarily than wait for regulators to do it by force.
In order to better understand just how far reaching YieldStar’s pricing algorithm is I found this map that shows all of the markets that RealPage covers.
I have been intrigued by the recent lawsuit filed against Former President Trump, not because of the politics around it but because of what it says about the state of our appraisal system.
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