The multifamily rental market in metropolitan areas has experienced skyrocketing rental rates over the past decade. Many casual observers believe the cause of this surge in rental rates is the rapid influx of new residents in urban areas. Just a simple supply and demand logic: demand went up, and supply did not rise with it, leading to skyrocketing rental rates.
So, what exactly is happening here, and how widespread is this problem?
In Metro Seattle in 2015, over 35,000 people became homeless for the first time. Seattle declared a state of emergency over the exploding homelessness crisis. See Declaration. But the crisis isn’t limited to Seattle; ten other large metros also filed similar states of emergency in the same period.
Today 43% of Americans—nearly 51 million households—can no longer afford the cost of housing.
In contrast, however, in 2018, Fannie Mae, Freddie Mac, and the Federal Housing Administration guarantee a record high $7 trillion in mortgage-related debt, a third more than before the 2008 housing crisis. However, logic poses a fundamental question, how can there be such a shortage of affordable housing when we, as taxpayers, guarantee more housing debt than ever before in our history?
I Wanted to Know Why
Beginning in late 2018, I took a four-year-long sabbatical and did a deep dive into the data that drives these pricing and leasing decisions. We moved to Seattle, one of the most rent-impacted cities in America, to begin the research. The process started by looking for and securing a rental apartment. My findings are summarized in the forthcoming book:
The Book is based on Facts
However, to assess monopolistic activities in an industry, the courts require a multi-step fact-specific assessment to assess market power, market structure, and its actual effect on competition. Therefore, six independent economic studies were completed to satisfy the court’s requirements also underpin the book. Please visit my website, Summary of Book 2, for additional information on each study.
- Study 1–The Washington Study—about 100 pages
- Study 2–Appendix ‘A’ The Pricing Concentration Study —about 300 pages.
- Study 3–Appendix ‘B’ the Property Managers: —about 150 Pages
- Study 4–Appendix ‘C’ The Technology and the Technology Providers: —about 100 Pages
- Study 5–Appendix ‘D’ Experian RentBureau: —about 100 Pages
- Study 6–Appendix ‘E’ How The Multifamily Tax Exemption (MFTE) Program Impacts the Affordable Housing Markets: —about 130 Pages
What I Found:
Cartels and Price-Fixing
The New Landlord, Powered by Big Data and Artificial Intelligence, details how the rental industry has been transformed into a data-driven economy predicated upon the theory that landlords no longer compete on price. Instead, they access and share all data on their applicants, tenants, and properties and jointly employ numerous algorithms using the data to improve profits. The Study verified that up to 95% of all rental units are priced through the RealPage common pricing platform (Platform).
Compounding the problem is that the property management industry is consolidating at an alarming rate and is profoundly interrelated and interconnected. Roughly half of all rental units in Seattle are priced by 13 managers who originated from a single company. Also, over 82% of all rental units are managed by national conglomerates. The Study concluded that significant pricing and management concentrations granted them market power sufficiently to control pricing.
They use the Economic Occupancy program to price their rental units. It parallels the pre-1960s bait-and-switch program by increasing the spread between the effective rate over the advertised rate of return—increasing the spread by up to 35%. At the heart, it’s designed to price out the bottom 15% of tenants to maximize profits. They manipulate the market by balancing supply (housing)— by holding rental units off the market; with demand (tenants)—they limit the number of tenants allowed into the renter pool. They claim that they can increase rents indefinitely when the market is in balance.
The stark truth of the pricing algorithm’s core programming is that it’s designed to price out the bottom 15% of tenants to maximize profits. Unsurprisingly, this allegedly illegal practice is exacting a heavy toll on our society and costing billions to taxpayers as the government bears the burden of increasing homelessness and its associated costs.
The use of the technology remains variably unchallenged or unregulated by any governing body.
The publication of this book represents a significant step in holding accountable the property managers who are colluding to artificially inflate housing rents and engaging in ‘restraint of trade’ practices, leading to massive profits for owners and housing insecurity and homelessness for millions of hard-working Americans.
I invite you to follow me over the next few months as I share some of the studies’ findings and join me in May, for the book launch.
I welcome you to visit my website, jamesmartinnelson.com, for additional information.