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Can Newmark Right the Ship at Flex Space Firm Knotel?

The story of flex space office operator Knotel’s rise and fall has been well-documented and is a somewhat cautionary tale for real estate startups. Knotel was a one-time unicorn valued at $1.6 billion, having raised about $560 million in funding between 2016 and 2020. They were an up-and-coming rival of WeWork, with their own eccentric CEO and co-founder, Amol Sarva. But the beginning of the pandemic in 2020 was not kind to flex space operators, especially Knotel.

How Knotel sank from real estate startup darling to filing for bankruptcy and being acquired by real estate brokerage Newmark is disputed by those close to the situation. Knotel’s co-founders have said the company was struggling but had plans to turn the corner despite the pandemic. Knotel’s Sarva famously said Newmark was a “stalking horse” and the $70 million acquisition of the company was a hostile takeover. Others say Knotel’s fall was a long time coming, as they were hemorrhaging cash (like rival WeWork), and legal troubles mounted amid pandemic-induced vacancies.

No matter who you believe, what’s less clear now is what’s happening now with Knotel. The flex space firm acquired by Newmark has been quiet in the year and a half following the bankruptcy and acquisition. Most people who worked for Knotel before the Newmark acquisition are no longer there, including the co-founders. And for a company that used to boast millions of square feet of space, it’s hard to find any information about how many locations Knotel currently operates. Even Knotel’s website today seems to reflect the rut the company has fallen into, filled with a blog and media section that hasn’t been updated for more than a year and is scattered with a few broken links.

To Newmark’s credit, the people I spoke to said there’s been a lot done to turn Knotel into a profitable company. One real estate professional referred to the process as “damage control.” A former Knotel executive told me Newmark acquired the business for next-to-nothing and may be able to turn it back into a billion-dollar company. “Once the market turns around, and it will, Newmark can make a killing off the Knotel acquisition,” he said.

Newmark’s acquisition of Knotel makes perfect sense, even if we haven’t seen the fruits of the labor yet. Rather than start from scratch and build its own flex space brand, the brokerage acquired a known entity they can capitalize on. Despite the acquisition’s rancor, it follows the same strategy as JLL’s creating their flex office brand Flex or CBRE’s investment in co-working brand Industrious. Some believe Knotel will be run better under Newmark, with access to a huge pipeline of Newmark’s client base. And as flex space and co-working continues to gain momentum compared to the traditional office market, Knotel could soon be poised for a surprising comeback.

Battered by the pandemic

Many people now know the story of WeWork and founder Adam Neumann’s rise and fall, even those not in the real estate industry. Books have covered the subject, documentaries, and a TV series. While Knotel was always careful to differentiate itself from WeWork, the company’s trajectory and crash were like WeWork’s in many ways.

Sarva and co-founder Edward Shenderovich founded Knotel in 2016 to offer mid-sized and enterprise companies office space with their own branding that would be managed by Knotel and carry flexible lease terms. While WeWork catered more to startups and small companies in its early days, Knotel looked to secure larger clients. Speed to market was another Knotel differentiator. Where WeWork would lease space and invest in lengthy build-outs, Knotel pursued profit sharing arrangements with landlords and would use a low touch approach to their improvements.

In 2018, Knotel closed a $70 million Series B financing round led, in part, by Newmark. The company was operating more than one million square feet across 60 locations, and revenue growth had increased 300 percent year-over-year, according to the firm. By August 2019, Knotel had reached unicorn status after the completion of a $400 million financing. The company said at the time it was operating more than four million square feet of space across more than 200 locations, including in New York, San Francisco, and Paris.

Knotel argued it was more stable than WeWork, but it seemed to have a similar money-burning business model even before the pandemic wreaked havoc on its finances. Knotel suffered net losses of $225 million in 2019 and then lost about $49 million in the first half of 2020, according to leaked financials obtained by Business Insider. Knotel owed investors about $84 million by the end of the first quarter of 2020, though the company disputed some of those numbers.

The company wasn’t prepared for the pandemic and a brutal 2020. The early stages of the pandemic destroyed the flex workspace model. Office tenants with flexible leases could drop them more easily as workers stayed home to avoid the coronavirus, unlike tenants locked into longer-term, traditional office leases where breaking them would incur more significant financial penalties. 

Knotel had two rounds of layoffs during the pandemic, began giving back sizeable portions of its portfolio, and then faced a growing number of lawsuits from landlords over unpaid rent. During 2020, Knotel was fighting at least 22 lawsuits in New York City alone for about $12 million in damages. By October 2020, Knotel planned to reduce its portfolio by more than 60 percent after already shrinking 20 percent of its space. “Business as usual is over,” co-founder Sarva said at the time. “Knotel has decided to take sharp action to prepare for the worst case—a long health and economic crisis.” In the second quarter of 2020, Knotel’s revenue dropped by about 20 percent.

Then came the bankruptcy and acquisition by Newmark in February 2021. Knotel estimated its number of creditors between 200 and 1,000. Newmark provided a $20 million commitment for debtor-in-possession financing, which provided liquidity to support Knotel’s day-to-day operations during the reorganization. “We look forward to supporting Knotel through this transitional period,” Newmark CEO Barry Gosin said. “We are providing capital to Knotel so it can right-size its business for the path forward.” But it wasn’t long until the hard feelings over Newmark’s acquisition surfaced and spilled over into the press.

A hostile takeover?

In April 2021, just a few months after Newmark’s acquisition, Knotel co-founder Sarva publicly trashed the brokerage and announced he was leaving the company. Sarva said in an email to a group of people that Knotel had reached “nearly $400mm of run rate in early 2020, posted gross profit, and even kept more than 2/3 of revenue intact while doing everything we could to support customer continuity and work with landlord partners amicably.”

Sarva then described Newmark as a “stalking horse” that used the bankruptcy proceedings to take control of Knotel with about $100 million of new capital. He said the process undermined vital relationships and hurt many customers and partners. “I’m so disappointed that this was the direction pressed. The process made clear to me that I would not choose to be part of the new owners’ way of moving forward,” Sarva said in the email.

Newmark didn’t respond to requests for comment at the time of Sarva’s email, and the brokerage didn’t respond to Propmodo’s requests for this story, either. However, it was clear that Sarva was bitter, and other former Knotel executives I spoke with echoed his sentiments. One source close to the situation told me that no matter how hard the co-founders tried to negotiate with Newmark, they wanted to own the flex space firm and essentially instituted a hostile takeover. He said the pandemic weakened the businesses, but they ended 2020 with a clear plan to move forward to a path of financial health and stability.

In March 2021, Newmark announced that it had hired a new executive team to run Knotel post-acquisition. The company hired Michael Gross as the new CEO and Eric Gross and Yoav Gery as Co-Presidents. Michael Gross previously served as a Vice Chairman of WeWork, and Eric Gross was a former WeWork senior executive. Knotel co-founder Sarva quipped in the email bashing Newmark that the company had hired “a group of Adam Neumann-era WeWork bros to lead the company forward.” Today, most of the original Knotel team and those hired by the co-founders have left.

Knotel’s new executive team has been in place for more than a year, but there has been little said about the direction the company is taking under Newmark. In September 2022, however, Knotel announced it was opening a location in an adaptive reuse property in Wynwood, a neighborhood in Miami. Knotel signed a seven-year lease for the 46,000-square-foot office component for the Wyncatcher building, a warehouse that will be turned into office and retail space. The building is scheduled for delivery in March 2023.

In October 2021, months after buying Knotel, Newmark acquired a majority stake in Paris-based office provider Deskeo. Newmark’s Gosin said the deal was a “testament” to the company’s bullish stance on the future of flex office space. Deskeo will add 50 office locations to Newmark’s portfolio, and the company offers flex leasing for on-demand large-format workspaces in Western Europe.

An industry flexing its muscle

Newmark has also been quiet about its plans for Knotel, and executives did not mention the company or flex office space much at all during its third quarter of 2022 earnings call. CEO Barry Gosin noted in the call that the rise of global interest rates has impacted Newmark’s transaction volumes, leading to a decline in the firm’s total revenues of 16 percent. The company produced stronger leasing activity in industrial and retail during the third quarter, but it was offset by lower office volumes. He said office leasing remained more active in the Sunbelt regions than in traditional core metro areas.

Whatever Newmark decides to do with Knotel, the growth of the flex office market bodes well for them. As traditional office owners have struggled with high vacancy rates, flex space has emerged as a bright spot. Forty-three percent of real estate decision-makers surveyed by JLL recently said they plan to accelerate investment in flex office space in the next three years. Knotel’s rival, WeWork, had reached a 72 percent occupancy rate across its portfolio of more than 700 locations worldwide in the second quarter of 2022. The growth in bookings and occupancy has happened even as WeWork’s stock price has fallen dramatically, which executives say doesn’t reflect the firm’s solid fundamentals.

Other flex space and co-working firms are doing better, too. IWG said in May it planned to open 500 to 700 new co-working spaces via its Regus and Spaces arms. This expansion comes after IWG was hit hard during the pandemic, much like Knotel, and filed for bankruptcy for a dozen U.S. locations. The bullishness about flex and co-working space has attracted the interest of big commercial brokerages, who are buying into the market.

CBRE acquired a 35 percent interest in Industrious last year and transferred its flex space brand, Hana, into the company. Meanwhile, JLL is fast-tracking the growth of its co-working arm, Flex by JLL, opening multiple locations in the U.S., U.K., and Australia. JLL has notably said it expects 30 percent of office space to be flexible by 2030. The flex and co-working space industry is maturing, and nearly all big real estate firms want a piece, including Newmark.

A looming recession could hurt the flex and co-working industry just as it’s starting to turn the corner, but when the market recovers, the flex space industry looks poised to grow. Newmark’s takeover of Knotel may have been a hostile one, but it could prove to be a profitable move. Once Newmark gears up its strategy for Knotel, they could stand to profit from the flex space operator and could turn it back into a billion-dollar business.

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