Another co-working casualty. This time, it's Knotel. Like many industries during the pandemic, co-working has been hit hard.
Knotel announced that it has filed for Chapter 11 while agreeing to sell the business to an affiliate of Newmark Group (NASDAQ: NMRK). Like many other co-working firms, Knotel overextended itself and is working on altering its business model to become more capital efficient.
This didn't come out of nowhere
Prior to the Chapter 11 announcement, Knotel was in the news for being sued for not ponying up rent obligations to landlords. As of December 1, Knotel had been hit with 21 lawsuits seeking around $10 million in damages in the New York Supreme Court.
Knotel isn't the only one
Other notable co-working firms are also on the brink. In late 2020, Breather announced that it is...going to take a breather. The company hit the reset button by laying off nearly 75% of its employees while closing over 400 locations. The growth in locations was fueled by raising over $100 million in venture capital.
Serendipity Labs, another co-working provider, filed for Chapter 11 in December of last year. The company struggled to refinance its debt, not uncommon among its peers, forcing Serendipity Labs to make this decision. Serendipity Labs was founded in 2011 and has over 30 locations.
The common thread
The playbook and resulting demise of individual co-working firms was pretty consistent across the board:
- Raise capital to grow as quickly as possible by acquiring as many leases as possible, allowing them to gain market share, quickly raise brand awareness, and develop economies of scale (pre-coronavirus).
- These models were inherently very fragile as growth was prioritized over sound economics.
- COVID-19 hit, leaving these firms with lease and debt obligations they couldn't meet.
While the virus was certainly a wrench thrown at these co-working operators, it shouldn't be considered an excuse. WeWork's cracks began to show before the pandemic; COVID-19 broke it open for the industry.
You can't talk about co-working without talking about WeWork
Of course we all know the WeWork story that played out since it tried to go public back in 2019. But they're in the news again. This time folks are saying that the company may try to go public via a SPAC.
Is this a positive signal for WeWork or a warning sign for SPACs? That's a question for another day.
The Millionacres bottom line
Is co-working dead? Absolutely not. Remote work trends, paired with the value flexible leases offer to companies, demonstrate that co-working provides value and solves a need. That being said, the business models are going to change and the economics will have to work. Going forward, that model surely won't be lease land grabs that rely upon continual rounds of funding.