It’s an odd time to be an office-rental company.
It’s not that WeWork’s competitors were rooting for it, but having a shiny poster-child for flexible office leases wasn’t exactly bad for business. Then WeWork fell apart: a failed IPO, an ousted CEO, a spectacular collapse in valuation and a $9.5 billion bailout from SoftBank. Once the flex office market’s biggest success story, WeWork is now its cautionary tale. Where did that leave other companies in the industry?
Not so badly off, says Knotel co-founder and CEO Amol Sarva. His 4-year-old office-rental startup recently topped 5 million square feet of global office space—roughly twice that of the Empire State Building—after adding 630,000 sq ft to its portfolio in the fourth quarter. That’s still peanuts compared to WeWork, which rented some 23 million sq ft in the US as of the second quarter of 2019, according to real-estate firm CBRE. But after WeWork imploded, slower growth is suddenly a selling point.
“Implosions are scary whenever they happen,” Sarva said. “I think the entire economy for a second back in September was nervous, and certainly the entire world of venture and technology and growth and real estate spent the next few months being quite uncertain. Because I think the WeWork implosion wasn’t just a real-estate mistake, it was a venture-growth mistake that sent a big message to everybody.”
The main difference between Knotel and WeWork is that Knotel doesn’t do co-working. Its clients include Starbucks, Microsoft, Oracle, and AT&T, and it says it works with 20% of the Fortune 500 globally. Corporate clients are attractive because they tend to be more stable and have deeper pockets than individuals and small businesses. WeWork made its name as a beer-on-tap-fueled paradise for freelancers and entrepreneurs, but even it re-focused on corporate clients a couple years ago and highlighted the share of members working for companies with at least 500 employees in its August 2019 IPO filing.
Another difference between Knotel and WeWork is the underlying business model. WeWork mostly leases properties from landlords and then subleases them to its own tenants, loading up its balance sheet with billions of dollars in long-term lease obligations. Knotel does a mix of direct leases and revenue-share deals. For the revenue-share agreements, Knotel solicits clients, builds out offices, and manages properties, and shares the rent paid to it by the client with the landlord.
Knotel’s pitch to landlords is that it can bring in high-value, multinational tenants like the Microsofts and Starbucks that those same landlords wouldn’t necessarily be able to land by themselves. In the fourth quarter, a third of Knotel’s real-estate deals were revenue-shares agreements. Sarva said those deals will likely be the majority of what the company does this year.
The revenue-sharing model is popular among other WeWork competitors. New York-based Industrious last year reoriented its model around revenue-sharing deals with landlords that have the landlords take on most of the investment in new locations. WeWork has spent heavily on upgrading its leased locations (“leasehold improvements”). Industrious CEO Jamie Hodari told Reuters the company makes a 90% profit margin when it partners with landlords compared to 30% on a more traditional lease. Industrious raised $80 million last August and said it expected to be profitable in 2020.
Runway East, a small UK co-working startup with five locations and £700,000 in financing, is also focused on revenue-share agreements. Co-founder and CEO Natasha Guerra said the company aims to give landlords a 20-40% premium over their regular lease. Guerra said these deals help insulate Runway East from shocks to the market, like a recession or a competitor like WeWork driving prices down through subsidies. She said in October that Runway East was looking to raise additional funding to help with expansion, but that investors were wary of co-working because of what happened to WeWork.
There is also Regus, an office rental company that grew quickly in the dot-com boom years, then filed for bankruptcy protection in 2003 after a market downturn left it with vacant offices and big losses. Regus is now the best-known brand of holding company IWG, which is headquartered in Switzerland and listed on the London Stock Exchange. Last year, IWG debuted a franchise model to accelerate growth in a less capital-intensive manner. IWG CEO Mark Dixon told investors in November that he expected to see “good flow” in 2020 “as the market inevitably consolidates in this sort of post-WeWork scene.”
Knotel has raised more than $560 million in venture financing, most recently $400 million last August at a valuation topping $1 billion. It operates in 17 cities globally. London is a key focus right now. Knotel added 106,000 sq ft there in the fourth quarter, for a total of 470,000 sq ft across 27 locations, even as WeWork reassessed its own London expansion plans, started serving cheaper almond milk, and limited the beer on tap. Knotel’s London clients include Twilio, Rolex, and Epic Games.
Knotel isn’t without its own stumbles. The company just last week laid off two dozen people in New York, about 7% of staff in the city, and also recently lost its head of corporate finance. A Knotel spokesperson said in an email that the layoffs “are regrettable but formed part of an organisational restructuring process that was necessary to ensure the sustainability of our continued growth.”
Sarva thinks Knotel’s biggest selling point is that it can handle the global office needs of multinational companies. “In one phone call with me, you can figure out what are you doing in Delhi, Tokyo, Los Angeles, and Paris all at the same time,” he said. The needs of Knotel’s customers increasingly determine where the company opens new locations, Sarva said, a strategy he contrasts with WeWork (“those other guys,” he calls them) which he said took an “if-you-build-it-they-will-come” approach.
“Well, now they’re here, and they’re on the Knotel platform,” Sarva said. “And certainly by next year that’s what everyone is going to be talking about. They’re not going to be talking about the irrationality of the past. They’re gonna say how much this business transformed, given the opportunity of the giant who stumbled.”