From: allin
Adam Neumann, known for his role at WeWork, launched a new startup called Flow, focusing on real estate investments [00:35:17].
The Flow Concept
Flow’s vision was to offer nice apartments in cool cities, emphasizing social interaction and communal spaces [00:35:27]. The business model also reportedly included a “rent-to-own” feature, allowing renters to receive equity in the company over time [00:35:39]. Neumann had a compelling vision to create a new, branded experience in apartment living, distinct from the super-local nature of current apartments [00:40:36]. Occupancy rates for Flow properties were high, and people were willing to pay slightly more for the experience [00:41:02].
Financial Challenges and Missteps
Flow currently manages around 3,000 units, most of which were purchased by Neumann after his departure from WeWork [00:35:50]. A key challenge for Flow stems from its financial structuring and market timing:
- Floating Rate Debt Neumann used floating-rate debt for acquisitions, rather than locking in lower long-term rates available around 2021 [00:36:17].
- Market Timing He purchased buildings at the peak of the market, around 2021 [00:36:48]. When interest rates spiked, real estate valuations declined [00:37:01].
- Inability to Make Payments A $60 million variable rate mortgage on one property led to an inability to make interest payments, creating a “perfect storm” [00:36:00], [00:37:11].
The core issue was that while the experience was good, the increase in rents wasn’t enough to offset the impact of interest rates and acquisition prices [00:41:23]. This highlights the real estate adage: “you make money based on the buy not on the sell” [00:41:38].
Comparison to WeWork
The situation with Flow shares similarities with WeWork’s challenges. WeWork delivered an “excellent product” that people loved for its “vibes, culture, and community” [00:42:18]. However, WeWork failed because it didn’t pay enough attention to the financial aspects, leasing offices at the market’s peak and over-investing [00:42:39]. Similarly, Flow acquired real estate at the market peak with a problematic capital structure [00:42:51].
The “Playbook” seemed to have changed. Earlier ventures like Green Desk or the first WeWork locations focused on cheap, empty buildings that were then made hip and profitable [00:43:43]. However, later expansions involved renting expensive, prime locations at unsustainably low prices [00:44:06].
“When you get into a real estate business it doesn’t really matter how great you are as an entrepreneur operator if you’re not good at like sort of the Legacy old school real estate part of it” [00:42:57]
Venture Capital Involvement
Andreessen Horowitz notably invested over 1 billion valuation in 2022 [00:37:20]. This investment occurred after the peak of the Zero Interest Rate Policy (ZIRP) era, when the challenges of rising interest rates were becoming apparent [00:37:26].
The reasoning behind such venture capital investments, particularly from “Mega funds,” is discussed:
- Capital Deployment Such investments allow large funds to deploy significant committed capital, moving them closer to raising new funds and charging management fees [00:37:45], [00:38:20]. The primary incentive for many venture funds, especially mega funds, is generating fees rather than solely carry [00:38:50].
- Betting on Experience Some argue for backing entrepreneurs with prior experience running large businesses, even if those businesses failed [00:38:33].
- The “Duck Test” A critical lesson for investors is to avoid confusing a business for something it’s not. If a company “looks like a duck and it quacks like a duck, it’s a duck” [00:49:46]. Flow, despite any technology layer, is fundamentally a real estate business. Experienced real estate investors might have passed on such a deal due to their understanding of the sector’s traditional economics (long-term, steady, tax-arbitrage based returns) rather than venture-style high returns [00:49:53], [00:39:22].
“The problem for Adam Newman is that at the end of the day his plan to raise rents by creating experience even though it worked it just didn’t raise rents that much and what ended being much more important were the moves and interest rates and how he capitalized these Acquisitions and the price he paid on the Acquisitions” [00:41:15]
Broader Real Estate Market Context
The commercial real estate market continues to face challenges, with sponsors and dealmakers “hanging on by their fingernails” awaiting lower interest rates [00:45:34]. Even properties with high occupancy rates can default if the capital structure is flawed and debt service costs consume all operating income [00:46:03]. Many are engaging in “pretend and extend” agreements with regional banks to delay defaults [00:46:27].