Adam Neumann’s Flow Might Solve At Least One Housing Problem
That’s if the tech lives up to anywhere near the billion-dollar hype
By Patrick Sisson August 30, 2022 8:00 am
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Like a real estate Rorschach test, Flow — Adam Neumann’s much-hyped, loosely defined new startup — can be a reflection of how one feels about the founder as well as the problem he’s supposedly trying to solve. But is Flow the answer that anybody’s looking for right now?
Apparently distraught at a lack of community, Neumann wants to create an improved, uplifting rental experience for what he once called the We Generation. He recently told the Financial Times it’s now the “R Generation” because the housing crisis is making it nigh impossible to leave the rental market.
Following news of the $350 million Andreessen Horowitz investment, which valued the nascent Flow at over $1 billion, a torrent of stories slowly brought the concept into sharper relief.
The picture they painted? Flow is a new residential brand with bespoke technology, blockchain (potentially crypto), a possible rent-to-buy-or-build assets component, plus an apartment operating system already in play (one that, according to a Forbes piece, may have appeared despite some messy conflicts of interest Neumann has with Alfred, a proptech firm with a remarkably similar product, of which Neumann owns a significant chunk). Representatives for Flow couldn’t be reached for comment.
Neumann’s idea can seem more like a prodigious proptech pitch deck, with pages from different startups combined into a presentation geared for maximum attention. But that doesn’t mean there’s not an opportunity, especially for someone like Neumann with significant capital at his disposal and thousands of apartments to his name in markets like Miami, Atlanta and Nashville. Alfred’s founders, in a statement to the press in response to Neumann’s actions, pointed out the potential: There are 38 million multifamily units in the U.S., yet minimal investment has gone into reinventing housing, a consumer category ripe for disruption.
“Will an app solve the housing crisis?” said Joel Steinhaus, a former WeWork (WE) exec who cofounded daybase, a coworking firm. “No. Is it an area ripe for innovation? Absolutely.”
Steinhaus believes the outlines of the Flow model suggest more flexibility, and utilization, of existing space. It envisions built-in coworking spaces for remote work, perhaps also community spaces, and ways to better optimize existing apartments and ease part of the housing supply challenge. He’s not sure exactly how WeWork’s core formula — selling office access by the desk and hour as opposed to set square feet over a traditional lease — will translate into people’s housing arrangements. But, in the competitive post-pandemic rental market, something that stands out could really take off.
Among startups in the residential housing sector, which have long toiled away at the problems Neumann wants to solve, there’s excitement over the scope of the investment in a market they’ve long felt has been underappreciated, and underfunded, by venture capitalists.
Casey Berman, founder and managing partner at proptech venture capital firm Camber Creek, said that it’s a huge boost to the sector, and “whether or not you’re a believer in Adam Neumann or that specific company, that doesn’t matter.”
A blog post from Andreessen Horowitz founder Marc Andreessen suggests VC royalty will take a personal stance on the potential for housing innovation to help fix a broken system, said Needham Hurst, business operations director for Up&Up, a startup aimed at helping tenants build wealth as they rent. It’s imperative, though, that Neumann understand the complexity of such an asset-heavy business model, especially when you have $1 billion to scale it.
“I think he’s got this platform to solve some part of it,” Hurst said. “But I think we should ask questions: Is it about more housing? Is it about building it more cheaply? Is it about accessibility?”
Of course, this isn’t Neumann’s first foray into residential real estate. The WeLive offshoot of the WeWork brand, which sought to capture rising excitement over coliving, crashed and burned. It was a utopia that ultimately opened only a pair of locations and ended up having inventory peddled on short-term rental sites. Neumann had long spoken of WeLive as being transformational, with members “never feeling alone” due to the focus on community. Former associates wonder if, with focus, he can make the model work.
“I have always thought that the insight was fundamentally right, and I imagine any issues with WeLive could have been solved through focused execution,” said Dan Teran, co-founder and managing partner at Gutter Capital, who sold an office management software system to WeWork and briefly worked at the startup. “It simply was not the core business.”
Teran believes the opportunity is now to build a category-leading multifamily operator by providing an elevated experience. That includes meeting people’s evolving lifestyles and preferences. The demographics suggest the approach might work. More than 80 percent of new households created during the pandemic were individuals moving away from home or out of space shared with roommates. “Better, higher density options in multifamily are an important piece of the housing puzzle,” said Teran.
Creating an enticing high-end rental platform to optimize property management and resident experience — ostensibly what a good portion of the multifamily industry is already pursuing — is an achievable goal. It’s one that Alfred, for instance, built over seven years working with owners such as Hines, Related Companies, RXR, Greystar, Invesco and Brookfield. But taking a step further into creating a platform that somehow makes renting, and even owning, more accessible, or that addresses a chronic housing shortage, is a completely different proposition.
“You also have to realize that you are targeting a different type of population when you’re doing something very tech-forward,” said Up&Up co-founder Ryan Brown. “How do you have inclusion in that model, so that everyone can get benefits in a fair way?”
Camber Creek’s Berman expressed measured skepticism about some of the more exceptional claims Neumann and others have made around Flow. Utilizing crypto and the blockchain to create more transparency and liquidity in real estate transactions theoretically works, but it involves getting a long list of stakeholders, including local government agencies, to sign on. Digital signatures for leases and closings took 11 years to gain acceptance, and digital notarizations became mainstream only because of a pandemic, so creating a completely digital transaction will take time.
Community is a great way to drive up the value of a property, Berman said, but it’s exceptionally hard to do it right, especially in residential real estate. He sees the real value in the other residents and the experience, not simply flexibility in payments and usage. It’s like scaling up a boutique hotel experience across 1,000 locations.
And bold claims of solving the housing crisis would require solving the affordability challenge — the largest dent in affordability would come from reducing the cost of construction. Currently, a highly amenitized building typically works only with high-cost apartments. It is unlikely even in the best-case scenario to provide enough efficiency to alter the fundamental cost of a unit.
“I struggle with the theory that you can use technology to make things cheaper,” Berman added. “The cost of the building is the cost of the building. When you reduce operating cost, how likely can you change the affordability of the asset? You change the profit of the owner.”
Then there’s the challenge of trying to aid tenants in building equity. Several enterprises have tried, and Neumann’s Flow aims to be the latest. Several entities have attempted to succeed with rent-to-own and similar equity-building models. Generally, they’ve been unsuccessful or underwhelming in the amount of equity they built for tenants. Michelle Boyd, chief strategy officer and housing lab director at the Terner Housing Innovation Labs, who specializes in real estate tech, says that rent-to-own models, and similar ones that build equity for renters, still have potential. Though there’s no getting around that history of models that haven’t worked or that have provided only token amounts of equity.
“To have that be provided to tenants in a way that’s meaningful, and still allow a company to grow and pay back VC investors, I haven’t seen the math work there before,” Boyd said. “It’s hard to imagine where the innovation will come from that will make the math work. I always hope to be surprised.”
The true measure of Flow’s success will likely be determined in large part by what problems the firm decides to focus on and how it’s ultimately structured. It will also depend on Neumann, who during the WeLive era was juggling numerous other products and responsibilities. In a hot multifamily market with rising asset costs, buying and operating properties has become more challenging than it’s been in years. (That’s a sharp contrast to WeWork’s beginnings during a post-Great Recession down market, when office space could be acquired at a steal.) But creating a multifamily brand with a slick operating system may be something the market really wants.
“What’s the one major problem you’re going to solve before solving the second problem?” said Berman. “There’s where I would have caution when looking at Flow. While $350 million is a lot of money, it’s not a lot of money to solve five problems facing the largest asset class in the world.”
“It costs a lot of money to change things in housing,” Boyd added. “Silicon Valley has backed several extremely large real estate startups that have tried to solve a million problems at once, and there’s a reason why that seems strategic, because the system is fractured in so many ways; and to have a transformational impact on the space, you need to be solving more than one problem. But it’s also a trap to create heavily capitalized companies that try to do too many things at once, and therefore don’t achieve one thing in particular.”
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