Why Adam Neumann’s Flow Will Not Be Another WeWork
Adam Neumann was in the news again, this time because he reportedly put together an investor group to buy WeWork, the flex office (née coworking) company he co-founded and was later fired from after the company’s failed, scandal-ridden 2019 IPO. The motivation for the offer is not entirely clear, since WeWork’s ongoing business health and market viability are questionable at best. To recap, after Neumann’s ousting, WeWork’s cleanup crew miraculously pulled together a blank check, SPAC IPO at a $9 billion valuation in October, 2021. Actually, it was only a miracle for early investors, who were given an out for their worthless equity shares. But SPAC investment gymnastics did not generate the missing market demand nor reduce astronomical operating costs that accompanied Neumann’s tenure. Initial stocks were priced at $9.82, but dropped to 10 cents in less than two years, and in November, 2023 the company, like so many SPAC’d IPOs, declared bankruptcy. Neumann is now back, wanting to buy the company he “built” back for $500 million (he “built” WeWork much the way a balloon artist “builds” balloons by inflating them). The offer comes as Neumann is launching his multifamily startup, Flow.
This is ostensibly a meaner, leaner WeWork, its portfolio stripped of its failing locations, which have either shuttered or undergone lease negotiations. But a retooled, discounted WeWork is far from an assured success. For one, overall demand for office space is in the gutter due to a combination of massive office oversupply, the universal movement towards remote and hybrid working, and AI’s forceful sunsetting of the white collar jobs — from copywriting to coding to lawyering — that offices have historically housed. Even if market demand increases for the type of flex office space WeWork provides, the total market will never approach the size needed to absorb existing office inventory (flex office leases currently make up less than two percent of all US office leases). And with office building owners already converting their offices to flex office space, venture-debt-laden operators like WeWork are in a much more competitive market today than they were a decade ago. Even with an optimized portfolio, a growing remote and hybrid workforce, WeWork will still need to find enough paying members at its locations to fulfill the rent obligations of its master leases. With the startup and tech scenes in deep decline — deserving victims of increased interest rates — I can’t help but think WeWork in any guise is bound to be another big, smelly, expensive turd in the shitter that is the office space market.
In August 2022, in defiance of Neumann’s mendacious past or any credible economic theory I’m aware of, venture capital firm Andreesen Horowitz committed $350 million to Neumann’s multifamily follow-up, Flow. It’s tempting to believe he will pull another WeWork with Flow, which is to say generate a ton of hype, attract a bunch of lemming-like investors (this time following Marc Andreesen rather than Masayoshi Son to the cliff), use that investment capital to inflate market demand and conceal losses, cash out, and let the company fail. But the economic landscape has changed from the days when WeWork hype, valuation, and investment capital abounded from 2014–2019, making it exceedingly unlikely Neumann can keep the grift flowing at Flow as long as he did at WeWork.
I speculate that Flow’s business model relies on buying or master leasing discounted multifamily buildings built during the era of cheap debt, and Flow’s focus on southern markets like Fort Lauderdale, Miami, Atlanta, and Nashville — some of the fastest growing metros of the last decade — support my speculation.
From what I can gather and its recently-launched, detail-light website indicate, Flow’s unique selling proposition revolves around West Elm-chic building makeovers, particularly for amenity spaces, which will be used for flex office space and “community” activities. Those activities will likely be accessed on proprietary tech (read: an app) that gives tenants opportunities to purchase a host of add-on services like house cleaning, dog walking, yoga classes, and so forth. Access to pretty spaces — ones that obviate any need to leave a Flow building — and the add-ons are the ostensible justification for a price premium over standard rental units. Value-add design, revenue from à la carte services, and rent roll are ostensibly where Flow will make money. (NB: Flow seems to have jettisoned any rent-to-own aspect to its business.)
The Flow formula is not so different from WeWork’s, whose business model relied on members paying a premium for its branded, technified, and communified office spaces. Flow’s model is also similar to real estate startup Alfred, which Neumann both invested in and has been accused of stealing its IP. But a critical difference between WeWork and Flow is that the former signed its master leases at the top of the market when debt was cheap and economic growth seemed unlimited; the latter is purchasing (and probably master leasing as well) properties towards — though not at — the bottom of the market when debt is scarce and expensive and enduring economic growth seems doubtful at best.
Further complicating Flow’s longterm viability is the sense that it’s an apartment rental company conceived of and invested in by people who have never rented homes. Neumann revealed how little he understands the housing market and the renter’s priorities when describing Flow at a conference last year, saying:
If you’re in an apartment building, and you’re a renter, and your toilet gets clogged, you call the super…[but] if you’re in your own apartment, and you bought it and you own it and your toilet gets clogged, you take the plunger.
You see, most of us — whether we rent, own, or squat — plunge our own toilets when they are clogged. Only the rich and most violent toilet cloggers call a super for something as trivial as a toilet plunge. We the poor renting masses also know how to order takeout and to find and develop communities without a startup telling us how. Like so many startups, Flow is solving the wrong problem. With half of American renters being rent burdened, there’s a limited market for those who care about — and are willing to pay for — a branded apartment that includes an app to let them buy inessential stuff. Most folks choose rental apartments based on their budget, tempered with a desire to get as much comfort and convenience as that budget will afford them. They form their communities primarily based on things like their backgrounds and interests, not their addresses.
No amount of deal flow, supply discount, or investment hype will generate durable market demand. And without that demand and its attendant revenue, Flow, like WeWork did before, will be unable to pay its mortgages and leases; this is exactly what’s happening to two of Flow’s initial properties in Memphis. According to Bisnow, “One of the [Flow] properties, Nashville’s Stacks on Main, has been struggling since June to earn enough cash to cover even half of its floating-rate $60M mortgage.” This shortfall is hardly limited to Flow, with a recent, sharp increased rate of multifamily mortgage delinquencies. Neumann’s remedy to Flow’s cash flow problem is the same as it was at WeWork: throw more investor funds on the losses to obscure the shortfall and lack of market demand. I think we’ve seen this one before.
