It's been a while since I wrote about the situation facing multifamily revenue management (RM). For anyone who hasn't been following developments over the past ten months or so, a series of articles and lawsuits have alleged that our industry's long-established RM practices constitute "A new kind of cartel that allows the nation's largest landlords to indirectly coordinate pricing."
These accusations originated in an article by activist news outlet ProPublica and were immediately followed by a series of class action lawsuits, which collectively gave rise to a flurry of media activity and even a Senate inquiry involving figures such as Senators Elizabeth Warren, Sherrod Brown and Bernie Sanders.
This blog has been critical of ProPublica and the allegations more broadly. Practically everything they claim about how our industry practices RM is highly inaccurate and misleading. But in numerous private discussions over the last few months it became clear that there was an important story that has been largely untold within our industry:
Not only is it untrue that multifamily is operating a pricing cartel, it isn't even possible.
It felt like a crucial discussion was missing from the industry narrative, so, several months ago, I set out to write an article about it. But to explain why a multifamily pricing cartel is impossible, we must first explain some fundamental aspects of how the multifamily industry works.
Today, we released a new white paper that explains how factors such as industry structure, financial incentives, RM fundamentals and technology combine to drive pricing decisions at individual properties. Anybody involved in or curious about RM in multifamily should read it.
The paper is intended to be a definitive source on this topic. With this in mind, two of the key figures in our industry's adoption of RM, Jeffrey Roper and Donald Davidoff, co-authored the paper. They played pivotal roles in developing YieldStar and LRO, respectively, and were both used as sources in a ProPublica article that presented a highly misleading view of multifamily RM. Both were understandably keen to use this new publication to set the record straight.
The Gist of the Paper
The paper analyzes the multifamily industry through the lens of the cartel allegations. A cartel can broadly be defined as "an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition." The paper focuses on three main sets of misconceptions that underpin the cartel allegations:
- Industry Structure: Pricing cartels require sufficient consolidation of supply that a relatively small number of operators have control. However, as I have extensively discussed in previous articles, the multifamily industry is unusually fragmented and has become more so over the past decade. And each entity, portfolio and property has such divergent financial objectives that pricing coordination is infeasible.
- Revenue Management 101: The allegations suggest that operators intentionally leave apartments vacant to drive up prices, similar to how OPEC cuts oil supply to raise prices. This notion contradicts the financial reality of the rental housing industry. ProPublica's cherry-picked quotes about fluctuating occupancy are actually about seasonality and basic RM, not supply or price manipulation.
- Competition in Multifamily Companies: RM systems are accused of supporting price coordination, but these systems are explicitly designed to enable communities to compete against one another. Fortunately, a piece of 2017 research uses data to show how thousands of properties used RM to compete over several years. The study (summarized in the white paper) shows the diversity of competitive strategies based on each property's unique demand conditions and financial objectives.
It is unsurprising, but nevertheless regrettable, that external actors are promoting such a misleading narrative about RM at a time when America is grappling with a housing affordability crisis. It is sadly too easy to find residents struggling with high rents and easier still to place the blame on software. However—as the white paper explains—it is supply and demand, not RM software, that determine house prices and rents.
RM is widely practiced in our industry, but not everyone is close to the details of how it works. We publish this paper to fill that important gap at a time when it is more important than ever to understand why we price the way that we do. Please download your free copy of "Revenue Management and Competition," share it with your networks and feel free to reach out with any feedback.