Adam Neumann's Flow Needs to Pivot. Here's Why.

Adam Neumann's Flow Needs to Pivot. Here's Why.

Andreesen Horowitz recently announced its largest ever investment, cutting a $350 million check to Adam Neumann’s new venture in residential real estate. His company, Flow, aims to build community among young people who value independence, freedom, and optionality above the traditional path of settling down.

Here’s why they’re doing it wrong.

What is Flow?

When the pandemic hit, plans changed. Offices closed around the world, kitchen tables became desks, and remote workers experienced revolutionary levels of geographic freedom. Today, 58% of American workers have the option to work remotely at least once per week. 35% are fully remote. Many have no desire to ever return to an office – especially when it means giving up the freedom to travel and live in a city of their choosing.

Consequently, the real estate market has boomed. Although we’re now in a period of stabilization, 2021 saw the largest increase in home prices ever, over 17%. As of January, the average rent for a one bedroom apartment increased over 22% year-over-year. As Marc Andreesen put it: if you can afford it, you buy a place, sign a multi-decade mortgage and prepare to settle down, or you rent, in which case you can make payments for decades without building any equity in a meaningful investment.

Flow plans to capitalize on these trends by predicting that younger generations don’t need to own their own homes but instead prioritize lifestyles of rich experiences and convenience.

Although their business plan has not been officially disclosed, analysts speculate that the startup plans to create community-focused living for nomadic workers, while helping them build home equity along the way. Flow will both operate their own assets – a 3,000 unit portfolio Neumann quietly acquired over the pandemic – and provide management to third-party developments. Residents, on the other hand, will have the freedom to “flow” from one city to another through Flow’s network of amenity-rich apartments on short- and mid-term leases. They’ll pay premium rents in exchange for quality living, generous apartment services, and equity in Flow’s system. In other words, they will rent-to-own a piece of Flow.

Put both sides together and you have a real estate owner-operator promising community and aiming to secure higher rents at lower vacancy rates.

What's the issue?

My skepticism in Flow comes from the way it plans to execute on its vision.

Issue #1: Rent-to-Own

Younger generations want the freedom to do what they want, when they want. And while short- to medium-term leases sound attractive because of the flexibility they provide, that flexibility comes at a cost. After accounting for Flow’s operating expenses, costs of amenities and luxury services, and the equity portion of each resident’s monthly payment, living in Flow will likely be far more expensive than renting a traditional apartment. But obviously, that won’t be part of the flashy marketing, now will it? But at least everyone will feel cool while being there!  

As a top real estate broker, I understand the appeal of rent-to-own real estate: it provides optionality without full commitment. But unlike in a traditional rent-to-own model, where residents pay a small premium to trial an apartment for a set period of time, with an option to purchase the property at the end of the contract, the equity Flow’s residents will build will be in shares of an unproven business. On top of that, most people use rent-to-own only when they are seriously interested in and able to buy the property they are renting; they just opt to carry the property in the short term before a liquidity event (or other life factor) allows them to close. It doesn’t make financial sense otherwise.

Flow is betting that residents will want to own their apartments – or at least a piece of the system. Even if they could afford to purchase, however, I’ve never met a young renter excited to buy their rental. Most young, ambitious people are eager to level up, especially when it comes to housing. So once they actually have the capital to buy a place of their own, they’re typically looking for places nicer than those they’re renting – and not with other people.

When considering Flow’s target demographic – young, well-paid (to cover all the fees!), remote workers – rent-to-own real estate feels like an awkward middle ground between a pure rental, which saves money and provides relative flexibility, and buying, which provides a foundation for wealth creation. Home ownership has been the primary means of building wealth in America for decades – 65%, with retirement accounts, in 2019. I don’t see that changing.

Issue #2: Community-First Living

Having grown up on an Israeli commune, Adam Neumann’s idea of community is vastly different from the rest of the country’s, especially where he’s been harvesting that SoftBank cash into multi-family properties in the American south. And, likely, he’s using false positives in demographic trends to support his thesis.

If the American dream is one of moving to the suburbs and buying space for family and a dog or a life of travel on a shoestring budget, Flow isn’t it. The image that Flow conjures is of reliving your college glory days, dorm room style – and paying a premium to do it.  Sounds nice.

For decades, homes have been bought, sold, and rented on the same three factors: price, location, and quality. No amount of community or new flavor of kombucha will change that.

While the proposition of working together merits attention, living together doesn’t. After leasing and selling apartments for over a decade, I can say with certainty that community is not the priority, nor is it a selling point. Today’s generation not only wants freedom, but independence, too.

Issue #3: Tech Valuations with Real Estate Returns

When investors realized that WeWork was a REIT disguised as a tech company, the valuation cratered from $47 billion to the $4 billion it’s worth today (which is still a large company, btw, and kudos to anyone who can build a multi-billion dollar public firm in any industry). Flow is much of the same: a residential multi-family real estate company recruiting tech-company VC. I imagine Flow’s office has a bunch of ex-leasing agents wearing Flow R&D Division Vince crew-neck t-shirts. Regardless of the payments infrastructure they build or the cryptocurrency they create, Flow’s customers will come to them for one reason: to find an apartment. If they market it to investors as anything otherwise, they’re taking on substantial risk.

The largest REIT in the world, Prologis, owns and operates one billion square feet of real estate and commands a valuation of $77 billion. First Service Residential, the largest property manager, operates 8,500 communities across the US and Canada and trades at $7 billion. To reach the size of Prologis, nearly twice the size of WeWork at its peak, Flow would have to buy and operate hundreds of thousands more units.

Because REITS are valued on their funds from operations, their future growth isn’t considered the same way as a tech company. And although real estate companies can use technology to create efficiencies, developing these tools in-house only narrows the already slim operating margins of a traditional real estate business.

There’s little doubt that Adam Neumann changed the global perception of office leasing. He took a big swing and made an impression. I respect his audacity and his ability to execute and create a culture that changed work, forever. But it’s also hard to ignore the holes in Flow’s vision or question the direction they’re headed. I care about America’s renters and don’t think Flow will get them any closer to home ownership. It will push them farther from it.

I am a massive believer in the way tech can disrupt how we buy, sell, and rent our homes. But, with where it’s headed, Flow feels dead in the water.