Knotel’s Bankruptcy and Acquisition by Newmark a Long Time Coming
The supposedly more stable alternative to WeWork was burning through cash before COVID
Knotel said in a statement that it filed for Chapter 11 for several of its U.S. locations to reorganize the company for the sale. As part of the proceedings, Newmark provided about $20 million in financing to Knotel.
“After a thorough review of strategic alternatives, we have determined that a process to sell our business and reshape our U.S. footprint is the best path forward to maximize value for our stakeholders,” Amol Sarva, CEO of Knotel, said in a statement. “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.”
Knotel filed for bankruptcy for more than 100 of its entities in a Delaware court — including ones tied to its locations at 419 Park Avenue South and 105 Madison Avenue — and said it planned to close U.S. locations as part of its restructuring. The company listed both its assets and liabilities as between $1 billion to $10 billion in its bankruptcy filing.
(Disclosure: Observer Capital, led by Observer Media Chairman and Publisher Joseph Meyer, is a Knotel investor.)
Knotel was crowned a unicorn in 2019 but faced a brutal 2020, as the coronavirus pandemic upended the flexible workspace model and workers stayed home to avoid the spread of the virus.
The company had two rounds of layoffs during the pandemic, started to give back huge chunks of its portfolio, and is now facing a growing number of lawsuits from landlords over unpaid rent. Knotel is fighting at least 22 lawsuits in New York alone for nearly $12 million in damages.
In October, Knotel planned to cut its portfolio by more than 60 percent — after already giving back 20 percent of its space — and to shift its focus to the European and Japanese markets. The bankruptcy filings do not include Knotel’s international operations.
Knotel was founded in 2016 by Sarva and Edward Shendorvich to offer mid-size and enterprise companies private workspaces with their own branding that were managed by Knotel and carried flexible lease terms.
But despite arguing it was more stable than WeWork — it even parked a bus advertising itself outside of WeWork’s headquarters in 2017 — Knotel had a similarly money-burning business model, even before the pandemic.
Knotel had net losses of $225 million in 2019, and lost about $49 million in the first half of 2020, according to leaked financials obtained by Business Insider. By the end of the first quarter of 2020, Knotel owed vendors $84 million. (Knotel disputed some of the numbers, but did not say which ones were inaccurate.)
The flexible workspace and coworking market has been hampered by the pandemic, but many are optimistic it will grow in the future as tenants look to give their employees additional options for working closer to home. A report from Colliers International expects the number of coworking and flexible workspace locations in the U.S. to double or triple within the next five years.
Yet, coworking operators have to survive that long. Companies like WeWork and Regus have been shuttering locations around the country, while Breather closed its more than 400 locations as it tries to pivot to an online-only platform. (WeWork has said that it closed spots to streamline its portfolio and help it achieve profitability, which it expects to do by the end of the year. It also told Reuters December was its best membership sales numbers since December 2019.)
“The decision I’ve made is that Breather, in its current form as an operator, doesn’t make sense, and, to be frank, I’m not sure it ever made sense,” CEO Bryan Murphy told The Globe and Mail. “I want to be like Airbnb.”