🚽 Whether you like it or not, WeWork’s Adam Neumann is right about the clogged toilet

Last week, US venture capital firm Andreessen Horowitz (a16z) uploaded a 53-minute discussion from November 2022 between David Ulevitch, Marc Andreessen and Adam Neumann to YouTube. The first 41 minutes and 37 seconds mostly involved a discussion of Neumann’s comeback, post-COVID remote working arrangements, the state of the private rental sector and the human need for person-to-person interaction. Nothing particularly revolutionary there. The remaining eleven-and-a-half minutes, however, were what got Adam Neumann’s detractors talking — in particular his claim that feeling ownership in one’s home would, for example, make them more likely to unclog their own toilet. Neumann then proceeded to claim that such a feeling of ownership could reduce churn (turnover of tenants) and therefore increase the net operating income (NOI) and financial return for a building’s investors. Twitter and LinkedIn were set ablaze — as were some notable business publications who said-it-without-saying-it.

A sense of ownership

Neumann’s claim of a sense of ownership aligns with a century-old theory known as “psychological ownership”, that is, “the state in which individuals feel as though the target of ownership or a piece of that target is ‘theirs’”. The very existence of possessive pronouns illustrates how embedded it is in our collective human mindset (my spouse, her article, their lunch table). In fact, you’ll find evidence of psychological ownership all around you. You might have a favourite desk in a co-working space that you’ve decorated, a preferred parking space, or in the case of Sheldon Cooper from The Big Bang Theory sitcom, “my spot”.

What the research says

Marketers do their best to create a sense of psychological ownership in the hearts and minds of consumers because of its impact on buying behaviour. Urban sociologists highlight the impact of hot desking on psychological ownership and its impact on employee morale, and consumer research indicates that psychological ownership influences prosocial behaviour. More specifically, psychological ownership significantly influences “value cocreation and stickiness”. At Pi Labs, we recently reviewed psychological ownership in the context of shared ownership of second homes facilitated by business models such as Pacaso and Kō Homes for our upcoming paper A piece of the action: innovations in fractional ownership and use of space. We asked how co-owners with different tastes and preferences could still experience psychological ownership through technology enabled personalisation of their shared home. Neumann’s detractors may feel justified in their feelings toward him for past circumstances, but they would be mistaken to dismiss psychological ownership simply because he spoke about it.

Can we link psychological ownership with financial return?

I’m comfortable with Neumann’s suggestion that a tenant’s sense of ownership will lead to better treatment of their homes. But will his new company, Flow achieve longer tenancies and increased financial return? In my experience, there are a few different ways to look at this.

Could Flow achieve an NOI premium?

According to the US Census Bureau (via St Louis Fed), the US rental housing vacancy rate has ranged from 5.6 to 11.1 percent since the Global Financial Crisis. In the a16z discussion, Neumann stated that the average churn of multifamily rental housing in the US is 50 percent — meaning the average tenancy lasts 2 years. If Neumann’s new venture can reduce churn to 40 percent as per his estimate, the average tenancy of Flow’s buildings becomes 2.5 years. That extra six months reduces vacancies by 20 percent — meaning if the benchmark vacancy rate is 5.6 percent, Neumann is implying a vacancy rate of 4.5 percent. This increases gross rental income by 1.1 percent, while also reducing variable listing expenses by 20 percent (because if tenancies last longer, you don’t need to pay agents to find new tenants as frequently). Both would contribute to a higher NOI, as per Neumann’s claims. But is it possible for a specific multifamily residential building to outperform its local market? Yes. Anecdotal feedback from international residential real estate groups indicates that this happens all the time — including one example shared with me where a suburb’s vacancy rate was 5 percent and a building’s vacancy rate within that suburb was closer to 0 percent. The bigger challenge for Flow is whether they can maintain a point of difference in undersupplied rental markets when every building is experiencing tighter vacancy rates.

Where does the ownership part come in?

Neumann pitches four pillars of Flow, with the fourth being a mechanism to share value with value creators (i.e. the tenants). My imagination suggests four approaches to this: (1) the value created by tenants is gifted to tenants as equity in Flow’s second pillar (the fund which owns the buildings); (2) the same thing, but the value is split between tenants and the fund; (3) Flow’s fund benefits from the NOI premium and tenants are offered a means of co-ownership via the opportunity to pay a rental premium; or (4) a combination of 3 and 4, where a rental premium is paid by the tenant in return for a higher proportion of equity in the fund (resembling a co-payment). Presumably, the above models are accompanied by a longer-than-usual rental contract (equity vesting period) and/or stipulations about maintenance expenses.

Is there enough information?

As you can see from my above observations, there’s a whole lot of filling-in-the-blanks. Not only on my part, but also on the part of those who have very quickly jumped on the “Flow is a grift” bandwagon. If you watch the whole video, you’ll notice Neumann repeatedly say Flow is “just getting started” and finer details had not yet been sorted out. Perhaps some feel justified in premature criticism due to past circumstances. Either way, if you’re seeking legitimate commentary on the viability of Flow as a business model, it doesn’t yet exist. What we do know, however, is that you are indeed more likely to unclog your own toilet if you feel a greater sense of ownership of your home. In other words, those who have a sense of psychological ownership of their home are prone to taking better care of it and will likely stick around longer.

Image acquired under fair use for research and commentary from youtube.com/@a16z

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