Merchant Innovation

How Knotel Is Building The Airbnb Of Commercial Real Estate

Knotel co-founder and CEO Amol Sarva has had a full life in tech. Apart from his current venture, Sarva is also the co-founder of Halo Neuroscience, Peek and Virgin Mobile USA – and those are just his better-known ventures. He founded his first firm when he was still a philosophy student at Columbia University, a web development firm called Netatomic.

In the course of founding all of those businesses, one of the many frustrations he faced was finding decent office space that could flex with his ventures’ growth and changing workspace needs.

“The constant need of a start-up is to be able to grow, shrink, grow again – move and pivot,” Sarva told Karen Webster for this week’s edition of The Matchmaker Is In. “But that’s very hard to find in the current office space market. We perpetually found ourselves either sharing someone else’s space, or having other firms sharing ours.”

That frustration gave birth to a new idea in 2015: a platform that could give larger companies – those with 100 or more employees – the same flexible workspace arrangements and outsourced office space management. Most larger companies got that flexibility by signing 10-year leases for 30 percent or more space than they actually needed. Space that sat on their books, unused, and probably for longer than they had anticipated – just to preserve the option of not moving multiple times over the course of that 10-year period.

In 2016, Knotel launched its platform that connects businesses needing that flexibility with commercial property owners who have unoccupied commercial spaces. With Knotel, Sarva said, companies can still sign leases with long terms – even 10-year terms – with the option to move to a different space within their network when the need arises. For Knotel, the old cliché of being a “win-win” proposition rings true. Tenant moves into new space, new tenant moves into the newly vacant space and probably at a higher price point and property owner doesn’t have unoccupied space.

“[Knotel] solves the ugly office market fragmentation problem that exists today,” Sarva said. “Today, there are districts in New York where we run 20 buildings. If a tenant knows how much room they need today, but not tomorrow, we have a hundred offers that we can show them that are all part of our network.”

Knotel has more than one million square feet of real estate under management (and growing) in New York, San Francisco and London – with more cities to come soon – and has raised $100 million since its launch in 2016. Its latest $70 million round was led by Newmark, one of the world’s larger commercial real estate brokerages.

A New Model for Leasing Office Space

Sarva said that Knotel is often compared to WeWork, a comparison that he bluntly says misses the point – and the value proposition that Knotel offers tenants and property owners.

WeWork, Sarva remarked, more or less modernized the three-decade-old Regis co-working model: rehabbing an entire building that becomes co-working space that they lease out and manage. Thirty years ago, that office space was comprised of wood molding and plaster walls; today, it’s glass walls and open meeting spaces.

Either way, the model is the same.

Knotel, Sarva said, solves a different problem for a different group of companies.

“Start-ups are a very small – important, but very small – part of the total economy, and relatively few people work in teams smaller than 10,” Sarva told Webster. “The 50 percent or more of the economy that will be 1099 workers in the near future, will be people working for large companies. Because big companies are what drive the economic growth, it made the most sense for us to focus on serving that segment, who wants the same workspace flexibility but has fewer options to find it.”

Knotel works with property owners to market and manage their unoccupied office spaces. Not only does the company find tenants for those property owners, but it also manages as many aspects of the space as landlords and tenants would like.

The model, he said, is more like Airbnb: putting available inventory online, managing and then helping property owners monetize that otherwise idle inventory.

That means if the tenant needs a special design feature, Knotel takes that on, too. Starbucks, Sarva noted by way of example, recently worked with Knotel to set up a design lab in New York, because they felt the lab team had a separate culture that was best preserved and nurtured away from headquarters. Knotel found the space for them, but then also created it in the image Starbucks envisioned, down to the design and branding of the space.

“We work with everyone to give them what they need, when they need it,” Sarva said. “When every lease was at least 10 years, companies that thought they might need more space would have to buy it – and then pay all kinds of fees for holding the space unused for a long time. The big problem is the market is finding what you need when you need it, and the only way to build certainty into those decisions was to overbuy and hold the space.”

Who’s Disintermediated?

Sarva said that Knotel is a boon for commercial real estate brokers who today work with firms to help them find suitable space by helping them make a lot more money.

“Brokers have relationships with [company] CEOs, and they serve as trusted advisors on what spaces to choose,” Sarva said. “Brokers waste a lot of time hustling to see spaces and decide what is up to snuff to recommend. When they bring a company to us to make use of the flexibility we offer, we are able to guarantee a uniform and continuous product experience for that customer. That has helped some brokers do as many as 10 times the deals they were doing – so they like our service.”

What’s Next

Today, Knotel is in three cities, with plans to expand to seven more in the near future. Not surprisingly, Sarva said he and his team are looking at the biggest cities that have the most workers, and thus the biggest demand for office space.

“Our goal for expanding is going down our list one by one based on the size of the market and market demand,” he said.

It is not an approach that will someday put Knotel in every city on Earth – after all, the city has to have a large enough demand among workers, and a large enough supply of existing business-friendly accommodations for Knotel to work with.

And, Sarva noted, they expect to be getting busier soon, as changes to the tax code will soon require businesses to declare all of their real estate leases as debt on their balance sheets. That means renting more space than a firm needs – in order to place-hold the space in case of future expansion – is about to get quite a bit more costly for firms.

“That is going to absolutely reduce the value of companies – and if you are a CFO, you need to be thinking about that.”

Knotel, he said, enables companies to drop those expensive placeholder leases and still be confident that when they need to expand where they want, when they want, they will have the option to do that, no matter how big they are.

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