Our Firm
Resi Wrap - Company Town
October 2023

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A shadowy group of billionaires has been buying up land next to a militarily strategic air force base in central California. Is this a front for the Chinese government, looking to spy on our latest warplanes? A dry-land attempt at seasteading, in which they can recreate Galt’s Gulch and wall themselves off from the rest of the teeming masses? Apparently not.

Some wealthy tech founders and an ex-Goldman banker, whose organization is named Flannery Associates, are apparently trying to build a new city in Solano County, CA. I can’t imagine any of them would want to live there. Have you seen this land? It has no public transportation, an average summer high of about 97 degrees Fahrenheit, and looks like this:

This is not exactly the California dream of Hollywood scenes and ocean views. Instead, this feels more like the latest iteration of tech veterans dropping a gauntlet against an apparently intractible market failure; in this case, the failure of California to build decent affordable housing.

Predictably, they are facing local opposition to their plans, including seemingly irrational opposition. Can you imagine not being willing to sell land that looks like the above photo for several million dollars over market value?

Also predictably, what sounds disruptively innovative is nothing of the sort. This is not even the first time in recent history that someone tried to build a new city in Central California. What appears different about this project is its scale (it is 10x larger than Mountain House) and the source of the money that is backing it (the oft-distrusted tech sector), both of which combine to create a sense of socially impactful ambition.

In the late 1800’s and early 1900’s, the concept of the company town was widespread throughout the western world. A company town would emerge when a labor-intensive firm would build housing and recreation around its place of business to accommodate its workers. The downside of this process is that the company would come to have a monopoly on both the employment that provided the town’s residents with money, and the housing, food, and entertainment that they spent it on, creating an insurmountable conflict of interest for the company not to exploit their privileged market position.

Company towns therefore largely went away as soon as we invented and broadly distributed gasoline-powered transportation to and from work. The ability for both firms and workers to settle across a larger area increased the resiliency of both, as firms could find new workers and workers could find new jobs with less friction. Increased mobility would therefore seem to work to the benefit of all, as well as the bargaining power of workers.

Fascinatingly though, as commutes have gone digital, effectively allowing firms and workers to locate literally anywhere in the world with internet access, a new sort of company town has emerged: the distilled workforce town. That is, given the extent to which home prices, the predominant driver of cost of living, have become stratified by geography, white-collar workers now choose their location by income level (implicitly, job function and seniority level), rather than firm.

While not suffering from the monopoly power implicit in the original company town, the challenge workers face in a distilled workforce town is potentially from a lack of opportunity, in which workers living in cheaper cities never personally interact with those who would promote them, except via Zoom. In other words, the proverbial story of the ascent from mailroom to C-suite becomes even less likely (and not just because no one has a mailroom anymore).

To the extent that Flannery associates is successful in building an affordable company town in Solano County, perhaps its relative proximity to the Bay Area somewhat mitigates that problem.

Company Rent

One problem with the traditional company town mentioned above is that the company ends up with a monopoly on housing, allowing them to set rent in the absence of market forces. In any housing market of reasonable size, the total real estate value of its housing is far too large for any individual landlord to corner the market in housing and exert monopoly pricing power. But what if all the landlords in that market instead used the same third-party pricing software to set their rents? Could that have the same implicit effect?

We pointed out a Propublica story on this idea in an earlier newsletter, and it appears that it’s just gotten more serious, as lawsuits have emerged against both Yardi and Realpage. These tools use what is called a “contributor data model,” in which customers contribute their proprietary data to a central repository in exchange for insights derived from the aggregate of that data. In this case, the software performs a rent optimization based on that data, which tells the landlord what rent to charge. The suits allege that this is effectively collusion through the third party algorithm.

Offhand, I would say this feels too abstract and theoretical to be illegal, not unlike the accusations that index funds are worse than Marxism. I’m not sure how you could conclude in favor of the plaintiffs here without setting some extremely broad and dangerous precedents. The fact that this went so quickly from a journalist’s idea to 2 lawsuits, however, makes the space worth watching.

The Rest Of Resi (There’s a lot this month!)

  • Barclays claims that baby boomers are the ones driving new demand from household formation. Ok, Boomer! Unless there are more boomers getting divorced than there are Millennials and Gen Z moving out of mom’s basement, I don’t see how this could possibly be true.

  • “We Buy Ugly Houses” accused of having a purposely predatory business model.

  • Speaking of predatory, this is the worst story I have ever read about HOAs.

  • It turns out that you don’t need an HOA to have other people tell you what you can’t do with your house.

  • HUD experimenting with cash giveaway instead of vouchers for section 8.

  • China may never have enough people living in it to fill all its vacant homes.

  • The “AirBnBust” will be glorious for landlords left standing, as restrictions are lifted by cash-strapped municipalities.

  • Speaking of AirBnB - they built a “Minority Report” algorithm to crack down on party-planning precrimes.

  • Brady Bunch house just sold. $3.2 MM for a home with 1970’s fixtures in a middle class neighborhood? Sure, Jan!

  • Cheesecake Factory > anchor tenant, per study. I feel like researchers are just ripping off our best ideas from Resi Wrap!

T-RECS Of The Month: Madison, WI

Cheap, smart, and fun wins, as the Steve Case “Rise of The Rest” crew like to say. And nothing is cheaper, smarter, and more fun than a medium-sized college town wrapped around a large and prestigious university, in the upper midwest, and in the 83rd percentile for population growth.