Buckle up, office tenants of the world. If you have any coworking/serviced office locations, you’re in for a wild ride in 2021. This past week, one of the largest coworking companies, Knotel, filed for bankruptcy, throwing their customers into uncertainty and shedding light on this real estate model in general.
Let’s start with a few basic facts:
The WeWork/Knotel model — In simple terms, the coworking company signs a long-term lease on an office space, builds out the space, and furnishes it. The coworking company then leases out the space to a tenant (the “customer”) at a higher rate than the current rent the coworking company is paying. This is their profit. This model works really well when tenants don’t have many options in the market.
But it’s a disaster for coworking operators like Knotel or WeWork when there is a glut of available office space in the market, which lowers market rents below the necessary profit threshold. It’s an additional problem when the market is also flooded with furnished subleases that compete with the furnished coworking product concept.
Now let’s talk about the risks if you’re a Knotel customer or taking advantage of a coworking space in your area.
Most coworking tenants are actually not really tenants—they are a licensee. You don’t have traditional rights granted to tenants. On January 29th, 2021, Knotel sent out emails to customers declaring bankruptcy, stopped paying their rent, and requested they immediately vacate all spaces or risk losing their possessions. This is a horrible reality in a pandemic when many companies have teams that temporarily relocated and will have a tough time getting to the space to remove their items.
#1 – Regardless if you are in Knotel or any other space, all tenants in any coworking/serviced offices should consider proactively removing important materials and equipment, now.
#2 – Take advantage of the sublease market. If you want built out, shorter term office space, you’ll find many new-to-market affordable choices in once out of reach locations like New York City, Boston, and San Francisco. Keep in mind that subleases do have some of their own nuances, as you are still at the risk of the sublessor paying their rent.
#3 – Hire an experienced real estate advisor who focuses on representing tenants and not landlords. This will help you avoid costly pitfalls. T3 Advisors is a leading example of this approach and would be happy to discuss the right real estate strategy with any interested companies.
#4 – If you’re required to pay a security deposit, use a letter of credit. If your landlord files for bankruptcy and you have a cash security deposit, you may lose that deposit to creditors.
#5 – There is a bright future for the concept of coworking/flex spaces — the pandemic will push many companies to seek shorter term, pre-built spaces offering shorter term leases. This will support the “hub and spoke” model. The challenge will be to find the right operating partner and landlord. Again, an experienced real estate advisor can help.