Knotel
Amol Sarva, CEO of flexible office provider Knotel
- Knotel has stopped paying rent on some of its huge New York City portfolio of office space and cut off other payments to key partners such as CBRE and Cushman & Wakefield, sources told Business Insider.
- The company's once-surging flex-space business has been hit hard by the coronavirus crisis, which has left tenants unable to occupy workspaces and prompted many to cease payments.
- Knotel's chief financial officer said in an internal email seen by Business Insider that the company is "completely clamping down on any and all payments."
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Flexible-office provider Knotel's heavy cost-cutting measures extend well beyond last month's 50% staff cut.
The New York-based company has stopped paying some rent and vendors - and it has a backlog of payments that predates the coronavirus by many months, a Business Insider investigation, which included talking to nine current and former employees and Knotel business partners, found.
Financial data reviewed by Business Insider shows Knotel had substantially missed sales targets as recently as the fourth quarter of 2019 and had accrued hundreds of thousands of square feet of vacant space months before the economic crisis touched off by the coronavirus began.
That may make it especially vulnerable to the downturn sweeping across the flexible-workspace industry.
Knotel was, until recently, one of the fastest-growing brands in the booming coworking and flex-space field, emerging as a chief competitor to WeWork.
Covid-19 has upended the soaring sector as small businesses, startups, and entrepreneurs that flooded into flexible workspaces in recent years have shed those locations or have stopped paying rent, leaving companies such as Knotel, in turn, with less cashflow to pay landlords.
Several sources with direct knowledge of Knotel's 2.5 million square feet of space in New York said the company hasn't paid rent for the month of April at several locations, including spaces at 40 Exchange Place, 5-9 Union Square West, and 61 Broadway. The sources said it is still possible the company could avoid missing the payments by settling the outstanding rent bills before the close of the month.
The cutoff of money is potentially painful to landlords. The Moinian Group, a large Manhattan property owner, for instance, is both an investor in Knotel and one of its largest landlords, hosting Knotel locations at several of its office buildings, including 545 Fifth Avenue, 60 Madison Avenue, and 90 John Street.
The landlord's chief executive, Joseph Moinian, declined to comment on whether he stood to lose money from his investment into Knotel's business and whether the company was still paying rent at locations within Moinian's portfolio.
Flex-space providers are looking to cut costs as space sits empty
Knotel is one of several major workspace brands that have sought to cease hemorrhaging money by cutting back - or abandoning - their rent obligations.
Convene, a workspace and conference company, is also cutting rent payments it makes to landlords across its portfolio, according to an investor in the company.
"Convene is working with all landlords individually and on a case-by-case basis," a spokesman for Convene said.
And WeWork has sought to renegotiate leases in its over 7-million-square-foot portfolio in New York in order to reduce its rent burden, according to media reports.
Businesses of all kinds have sought to hold back commercial rents as social distancing rules have prevented many from occupying their office space. Landlords, which are currently prohibited by a New York state moratorium from evicting both residential and commercial tenants, have urged office occupants to continue to pay.
Because of the widespread economic dislocation from the crisis, it is expected that many owners, however, will be flexible with late or discounted payments rather than pursue wide-scale evictions.
"Given the unprecedented times we are witnessing due to the effects of Covid-19, the Knotel team is focused on balancing the interests of customers, partners, and investors, in efforts to build a sustainable, long-term business," Ivy Chiou, a spokeswoman for Knotel, said in a statement. "We are taking these steps to ensure we are well-positioned for both current times of great crisis, as well as when business returns to a new normal.
Chiou said the company would not confirm whether it had suspended rent payments, nor whether it was current on its rent in any specific locations.
Knotel struggled to hit its targets well before the coronavirus hit, its internal financial reporting viewed by Business Insider shows.
Knotel has said publicly that it had $350 million in annual revenue lined up at the start of 2020. According to internal documents seen by Business Insider, the company had $335 million of annual revenue signed on near the end of the fourth quarter of 2019, $80 million short of its $422 million forecast.
In New York, Knotel signed just $5.8 million in net new contracts in the fourth quarter, compared with a goal of $51.5 million. Across the 15 cities globally where the company operates, it added about $50 million of new revenue in the quarter, $50 million short of its target.
Across the 15 cities globally where the company operates, it added about $50 million of new revenue in the quarter, $50 million short of its target.
Flex-office companies generally saw a slowdown in leasing activity in the fourth quarter, per CBRE data. Much of that industry-wide decline was driven by WeWork, though Knotel's drop in leasing - 70,000 square feet of new deals in the fourth quarter, a decline of 80% from its quarterly activity over the previous year - was much more precipitous than competitor Industrious, which was down 6.5%.
The leaked financial documents also showed that Knotel had about 500,000 square feet of vacancy in its portfolio in December, a number that is projected to grow to 1.5 million square feet as it takes possession of additional spaces it has committed to lease.
Hundreds of thousands owed to brokerages
One current Knotel employee said that the company's legal and finance teams were "combing through the leases to see where we can stop paying rent" so that the company could fund payroll.
The source, who was not authorized to speak with the media, said Knotel considered payments to vendors, general contractors, and brokers as its last priority, with those payments likely to be deferred for three to six months or longer. The source also said Knotel was evaluating the possibility of extracting itself from spaces by encouraging landlords and the occupants of its spaces to strike a deal directly, with Knotel no longer the middleman.
"Knotel would get out of an unfavorable real estate deal, the landlord would get a paying client, and the tenant would remain in the space, however without Knotel's workspace management operations," the source said.
Knotel has also fallen behind on commission payments to major brokerage firms that have arranged leases for occupants to take space in Knotel's portfolio. According to two sources with direct knowledge of the agreements, CBRE and Cushman & Wakefield, two of the largest commercial real estate brokerage companies, are each owed amounts in the hundreds of thousands of dollars. CBRE and Cushman & Wakefield declined to comment on the commission payments. Knotel's spokeswoman declined to comment.
Another brokerage firm, SquareFoot, is also owed a commission, two sources with direct knowledge of that debt said. One source described the commission as a five-figure sum.
Stiffing brokerage companies could dissuade those firms from bringing Knotel tenants in the future, potentially dealing a blow to its future growth plans in the city.
A former Knotel employee, who spoke to Business Insider on the condition of anonymity, said that the company has unpaid bills that total in the millions of dollars, based on vendor negotiations in which they were directly involved. Knotel's spokeswoman declined to comment on outstanding bills.
One vendor, for example, was owed $500,000 - and their unpaid bill dated from at least last summer, this source, who left earlier this year, said.
Once, a Knotel employee accidentally copied a number of vendors on an email about vendors Knotel planned not to pay. In most instances while the source worked at Knotel, vendors were eventually paid, at least in part.
"Most of them at least got paid at least some of what they were owed. That was enough to keep them at bay, and our finance team was keeping track of how frustrated everyone was at them," this source said.
Knotel's CFO, John Jureller, who was hired into the position in March, wrote in a recent internal email that was viewed by Business Insider that the company was looking at payments to vendors and landlords to try to stabilize its deteriorating financial position.
"At this time, we are completely clamping down on any and all payments other than our obligations to employees and our contractors / temps," Jereller's email read. "Together with legal, we are carefully analyzing the impacts to landlords, vendors and other statutory payments."
In a dramatic cost-cutting measure last month, Knotel laid off or furloughed half of its 400-person staff. Amol Sarva, a tech entrepreneur who co-founded Knotel five years ago and pushed the business aggressively to compete alongside WeWork, continued to strike a cheerful tone on his LinkedIn page despite the company's recent setbacks.
"Knotel is hiring," his page states. "Join us."
Business Insider previously reported that Sarva had sent a company-wide email laying out Knotel's plans to bury upcoming staff reductions by seeking to run a positive news story about real estate's role in helping the community during the coronavirus pandemic.
-Alex Nicoll contributed reporting.
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