Knotel, which was founded in 2016 and known to be WeWork's biggest competitor. was growing at an alarming pace with expectations of 1 million square feet of office space in NYC.
“The pandemic created a uniquely challenging operating environment, with significant impacts on leasing velocity and the rate of renewals in key markets, particularly New York and San Francisco,” co-founder Amol Sarva said in a statement.
I'm not quite sure the pandemic is what's to blame here though. Their model, which was essentially to lease space at low base rent with a significant tenant improvement allowance package and then leasing that space at a premium by offering furnished & wired options, all in pricing cutting out additional common charges, offering shorter term length solutions, and branding opportunities, etc
This TI Allowance package gave them the opportunity to build new spaces on the landlord's dime while looking for someone to fill the space and ultimately turn on a profit on what they were paying in rent.
A fellow broker posted this on Linkedin and I loved it: A successful business is nothing more than: Revenue > Expenses.
They were moving too fast and had way too much vacancy and an enormous rent obligation.
Quick story -
I was once looking for an office space for one of my clients when I came across a building with two floors available. One of the floors was a Knotel floor and the other was direct through the landlord. Knotel space was asking $75psf while the other was asking $50psf... It's hard to put both of these spaces in a survey and explain that this space is significantly more expensive because they're offering branding, furniture, all in pricing, and customizable term lengths. Not enough of a draw. to make someone pay almost double the amount in rent. Most companies' biggest number on their balance sheet after employee salaries is their rent. Although furniture and branding concepts are nice, it just doesn't justify companies that can pay half the price in the thousands of options for office space in NYC.
Nonetheless, they raised hundreds of millions of dollars from investors and created a brand name for themselves in CRE industry. We're all definitely surprised that Newmark is providing Knotel with $20 million in debtor-in-possession financing to allow it to continue operations during the bankruptcy process.
Knotel sent an email out to their network and made everyone aware that "Knotel will continue to operate – globally – even as we work to rightsize the portfolio and our operations."
I'm excited to see where things shake up with them and I'll definitely be following the story closely. Most likely won't show any of their spaces to my clients but I wonder if other brokers will.
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