The San Francisco Board of Supervisors passed an ordinance Tuesday that will prohibit the sale or use of “algorithmic devices” used by landlords to set rents or occupancy levels for residential rental units in the city.
Pounding the gavel, Supervisor and board president Aaron Peskin said that San Francisco is the first city in America to pass such a law. The new law will render civil penalties of up to $1,000 per violation and fines that cover damages, restitution and attorneys’ fees.
“This ordinance will be an example for cities all over this country,” he said.
Residential landlords traditionally set rental rates by comparing their properties to similar ones in the same market area. They factor in the condition of the property, the economic climate and tenant improvements.
But with the rise of artificial intelligence and rental pricing software like RealPage Inc., property owners have started using real-time dynamic pricing that updates regularly.
According to a board presentation in July by Lee Hepner, senior legal counsel with the American Economic Liberties Project, an anti-monopoly nonprofit research organization, those rates are based on a model trained on a large dataset of over 16 million units.
The software is also improving as new property managers are added to their list of clients. It is currently responsible for the pricing of 8% of all rental units nationwide.
Hepner said the AI relies on landlords disclosing data about their units to RealPage. Though it would not normally be in landlords’ interests to share such information, they offer it because they receive the benefits of their competitors’ data in return.
The Federal Trade Commission data shows rents increasing 20% nationwide since 2020. Economic data from the U.S. Bureau of Labor Statistics shows that rents in the San Francisco-Oakland-Hayward metropolitan statistical area have increase at a faster rate than the rest of the country, as seen in the rental consumer price index, a measure of the average change in prices overtime.
Is it friend or foe?
According to May 2023 figures from RealPage, 6.1% of rental units in the San Francisco metropolitan statistical area use AI Revenue Management or YieldStar, two of its products. Since that’s such a small part of the market, RealPage contends, price-fixing and collusion cannot occur through its devices.
Instead, RealPage says the software benefits both landlords and residents. The company also said its products can recommend that rent prices decrease, increase or stay the same, but do not require that users apply those recommendations.
Multiple investigations and lawsuits around the U.S. have charged that the software has driven double-digit rent increases and encouraged landlords to hold tens of thousands of units vacant to create artificial scarcity.
In August, the U.S. Department of Justice, together with the attorneys general of North Carolina, California, Colorado, Connecticut, Minnesota, Oregon, Tennessee, and Washington, filed a civil antitrust lawsuit against RealPage for its alleged scheme to decrease competition among landlords in apartment pricing.
According to the Department of Justice, RealPage also encourages loyalty to the algorithm’s recommendations through an “auto accept” function. It has pricing advisors who monitor landlords’ compliance.