💼 Future of Residential Rentals

briefcase | invest smarter | issue #89

👏🏼 WeWorked, now WeRise

The future of residential real estate is manifesting itself as we speak. Several stories hit the wires over the past week that coalesce into a beautiful bouquet of real estate intrigue, drama, and salvation.

Let's take a closer look at WeWork's former CEO Adam Neumann's new residential venture, what it means for our industry, and the beautiful hypocrisy of housing commentators.

Act 1: WeRise - A New Venture

Despite still being in operation, the fall from grace of WeWork was headline news back in 2019. TLDR: Through severe mismanagement, financial impropriety, and a creepy Jesus complex, Adam Neumann, the founder of WeWork, was ousted as CEO following several public revelations and an IPO flop.

At its height, WeWork was valued at just shy of $50 billion, now its current market cap is $3 billion.

Source: The Information

Drugs, private jets, ambitions of immortality, Coachella-style work parties, and personally taking $6M from the company for the licensing of the word 'We', were all widely reported as the strange and misguided antics of the founder.

But, this aside, let's give credit where credit is due. WeWork both productized and revolutionized the shared office model and continues to operate as a billion+ public company.

After laying low for a few years, last week it was announced that Adam was launching a new company, Flow, to bring similar disruption to the legacy residential real estate industry.

Flow is reported to be a community-driven residential startup that sounds a lot like WeWork, but more of a dorm for adults. This ambitious goal is not new, but this is the first time it has moved out of the WeWork sphere into its own brand.

The new company has also risen to unicorn status ($1B+ valuation) almost overnight after Andreessen Horowitz (AH), the OG of venture capital, pumped $350M (its biggest investment to date) into Flow.

This is saying something because AH is considered one of the original and most sophisticated VCs globally. They have been early investors in companies such as Apple, Facebook, and Airbnb. Flow already owns ~3,000 apartments in the U.S., and plans to officially launch its first branded apartments in 2023.

Act 2: The Backer - Andreessen-Horowitz

How did the former WeWork CEO convince AH that he was worth the investment? Well, Adam is reportedly quoted as saying, "I'm a Neumann."

We couldn't find a source for that quote, but we're pretty sure that's how it played out. Marc Andreessen, the A in AH, released a blog post about the investment. Here are a few key quotes that frame the investment decision:

Our nation has a housing crisis.
Our country is creating households faster than we’re building houses.
Apartments don’t generate any bond between person and place and without community, no bond between person to person.
Giving renters a sense of security, community, and genuine ownership has transformative power for our society.
The residential real estate world needs to address these changing dynamics. And yet virtually no aspect of the modern housing market is ready for these changes.
And so, we are excited to partner with Adam Neumann and his colleagues on Flow, which is a direct strike on precisely this problem.

Cool. We can get behind that. Marc Andreessen also released an earlier blog post further driving the point home, titled It's Time To Build. A few more key quotes:

We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices.
We also can’t build the cities themselves anymore.
We need to break the rapidly escalating price curves for housing, education, and healthcare, to make sure that every American can realize the dream, and the only way to do that is to build.

We've reported on the housing supply issues for years here at briefcase, so we can certainly get behind this mission to invest in Flow: To bring every aspect of the living experience together.

Except, there's ONE SMALL detail keeping us from a standing ovation.

Act 3: NIMBY HYPOCRISY

Unfortunately, Andreessen's very well-articulated rallying cry for more housing is less appealing when you read about his personal life. According to recent media reports, Marc and his wife Laura sent their municipality a scathing rebuke to a new housing development in Atherton, California.

According to The Atlantic:

The planning department proposed to modestly increase the zoned capacity of Atherton, legalizing the construction of smaller, multifamily properties in a few places—just a little more than 130 units total by 2031.

In response to this, Laura and Marc submitted this to the city (it has since been taken down from the public website):

Subject line: IMMENSELY AGAINST multifamily development!
I am writing this letter to communicate our IMMENSE objection to the creation of multifamily overlay zones in Atherton … Please IMMEDIATELY REMOVE all multifamily overlay zoning projects from the Housing Element which will be submitted to the state in July. They will MASSIVELY decrease our home values, the quality of life of ourselves and our neighbors and IMMENSELY increase the noise pollution and traffic.

Whoa, that's A LOT of caps. This is an unfortunate example of the HYPOCRISY that highlights the ongoing struggles between NIMBYism and housing supply.

Marc is all for increasing the supply of homes, just not in his BACKYARD.

In a rebuff of Marc Andreessen's above rant, Marc Andreessen had this to say in a 2020 blog post:

The problem is regulatory capture. We need to want new companies to BUILD these things, even if INCUMBENTS [like me] don’t like it, even if only to force the INCUMBENTS to build these things. And the problem is will. We need to BUILD these things.

*Caps added for dramatic effect*

The reality is that NIMBYs are everywhere. And, SPEAKING of fail...

Act 4: Why WeFailed

Back to WeWork. So why did the co-working behemoth seemingly fail so MISERABLY at the end of Adam's tenure as CEO? The business vision and product were stellar, but how Adam executed is where the company got into trouble.

Talk to any commercial property owner or investor and one of the key components of their business model is longer-term leases. Unlike in residential real estate where you sign a 1-2 year agreement, commercial leases are typically signed for 5+ years. Why? CERTAINTY. Commercial property owners want the certainty of revenue.

So, WeWork signed long rental leases, but then resold space on a short-term monthly basis. This arbitrage worked while the market was hot, but during recessionary times people can pull back on their WeWork subscriptions but the company is still left with these long leases.

At the end of the day, the fact that WeWork didn't own any of the real estate allowed them to grow very fast, but it also hurt them when economic times weren't healthy.

That said, Adam seemed to have learned from this business model flaw, and recently purchased thousands of apartments that will form the basis of Flow's initial residential offering.

Less arbitrage, more ownership = better business model.

For more, Apple TV+ chronicled the entire WeWork fiasco in the mini-series WeCrashed, starring Jared Leto. Life advice: If Jared Leto is playing you in a mini-series, chances are things didn't go as planned.

Act 5: Flow - Failing Up & Why WeLike Flow's Biz Model

What follows may not be the popular stance to take given the onslaught of negative press and dunking around Flow, Adam's comeback, and AH's investment.

But the reality is that Flow is addressing a gap in the residential real estate market around branding and productizing the living experience. WeWork proved this model works for office space, and Flow could become that national brand with a product and community-driven living model.

Flow isn't the first to market with this type of vision, other startups like Culdesac (raised $30M) and Landing (raised $125M) are seeking to transform neighborhoods into branded and community-oriented experiences.

More of these startups like Flow and Culdesac will come online in the coming years, and that's a good thing.

Where WeWork didn't own assets, it appears as though Flow will. Where WeWork's arbitrage model fell flat during downturns, the vision of Flow, if executed properly, has the hallmarks of a business with more longevity.

Neumann is a serial entrepreneur, which gives him better odds of winning, and the experience at WeWork could act as his MBA.

The Bright Future of Branded Residential Living

Despite the rocky track record of Adam Neumann and the hypocrisy of Mark Andreessen, WeBelieve they are on to something SPECIAL.

Unfortunately, in North America, we have lost the ability to build communities, in favor of glass boxes and cookie-cutter McMansions.

How the coming decade plays out with Flow and the broader market generally is anyone's guess, but the reality is that branded community and residential experiences through hard real estate asset ownership is a growing trend that will help improve our housing market and renter experience.

Marc Andreessen said it BEST: "We can’t build cities themselves anymore." Projects like Flow are attempting to change that, and we APPLAUD them.

So What? Despite the absurdity of a billion-dollar startup that is pre-launch, branded residential real estate is a noble mission and a potentially massive and lucrative real estate niche.

Worse case, producers at Apple TV+ may have new content for another mini-series. We've already come up with some working titles...

OverFlow: Great, Now We Have 60,000 Branded Apartments With Budtenders

Going With The Flow: Putting The 'Meh' In Apartmehnts

Weekly Real Estate Stories

💰 Dry Powder: Brookfield raised $14.5B for its latest real estate fund — Propmodo

😓 Compass: Compass reports a loss of $101M and will no longer offer equity to new agents — TRD

😓 Compass: Their CTO sold 40% of their holdings and the head of customer success sold most of hers as well — TRD

📉 Market Conditions: Home sales projected to fall 16.2% — Inman

📊 Which Is Why: Many experts are projecting a ‘housing recession’ — CNBC

💰 Moderating Rent: Median listed rent was $1,879, an increase of just $3 from June — Realtor

📈 Missing Middle: The construction of small multifamily increases slightly last month — NAHB

Up next, on briefcase...

...We find a much better co-working spot than WeWork.

Read the most-shared newsletters:

🔵 Double Double Toil and Bubble Trouble?
🥰 Love Song To YIMBYism
🏡 Missing Middle Housing
👮‍♂️Yes, Affordable Housing is Illegal
🎬Big Short 2: Supply Crunch

Written By Brad Cartier