- Are flexible workspace operators growing too fast?
- Following WeWork’s failed IPO, high-profile brands including Knotel, the Riveter and Breather have made redundancies and cutbacks.
- This could be due to a number of factors such as rapid growth and overspending. What happens next for these operators?
Less than a month into 2020 and there’s already a lot happening within the flexible workspace industry.
Last week, The Real Deal and Geekwire both published articles about coworking space operators making redundancies, just several weeks after WeWork laid off thousands of employees following its failed IPO and less than six months after Knotel raised $400 million in a funding round.
Knotel reportedly laid off “as much as a third of its New York market-focused staff.” The culprit? High vacancy rates and a drop in leasing activity — a CBRE report found that Knotel’s leasing activity dropped roughly 80% in the last quarter of 2019.
According to The Real Deal, Knotel fired close to 20 people from its West 38th Street office, which had between 50 and 60 employees.
A statement released by Knotel said:
“Knotel has grown from two employees in one city to 500+ people in 17 cities over the past four years to become the leading global flexible workspace platform. Our business will continue to evolve and change to best meet the needs of our customers.”
For its part, Geekwire reported that female-focused coworking space The Riveter was cutting five positions. The company currently employs around 100 people. The Riveter’s founder, Amy Nelson, stated that the cuts were part of a restructuring plan for 2020; the company is currently hiring for 5 open roles.
Like Knotel, the Riveter has also grown exponentially over the past couple of years. The female-focused coworking space has expanded from 2 to 7 cities over the last year and now operates 9 locations. The company has raised $15 million in a Series A investment in December 2018 and it wants to open 100 locations by 2022.
Back in early December 2019, another flexible workspace operator laid off a significant percentage of its employees. The Real Deal reported that Breather “fired almost a fifth of its staff.”
Soon after the news broke out, Breather’s CEO acknowledged overspending within the company. The company had spent $120 million of the company’s $122 million publicly disclosed venture funding, Betakit reported.
Too Much Growth, Much Too Soon
The flexible workspace industry has grown at an exponential rate over the past few years. Experts had predicted that the growth rate was set to decelerate in the coming years, so the question is, has the industry reached that point?
Maybe. Maybe not.
According to a former Knotel employee quoted in The Real Deal:
“There was a lot of shade thrown on other businesses. But it was the exact same business model.”
So it may not be the industry itself that’s slowing down on growth, but rather the operators that have the same business model or similar to that of WeWork are the ones that are struggling.
That, or the fact that maybe they grew too much, much too soon.
Or it could be a combination of both factors.
The economy is the strongest it has been in many decades, and yet some operators are already experiencing a decline, while others report being cash rich and growing.
The difference between those struggling and those generating a profit seems to be their rate of growth.
Breather, Knotel, The Riveter (and even WeWork), grew exponentially in just a few years. Their focus was to grow to as many locations as possible in as little time as possible.
In contrast, operators like Premier Workspaces and International Workplace Group’s Regus and Spaces brands have grown slowly over the past several years and they have plenty of cash to run through. Their focus, rather than fast growth has been to mature and develop existing locations.
Or Could It Be Their Timing?
Another key difference between Premier Workspaces and IWG compared to Knotel, the Riveter, WeWork, and Breather is that the first two have been around for a much longer time than the latter four.
This is important because real estate prices increase with a good economy. So while Premier and IWG were likely able to sign leases when the market was low, the likes of Knotel, WeWork, the Riveter, and Breather have signed long-term leases in prime locations when the market was mid or high.
So not only did these companies grow too fast; they grew too fast in an expensive market.
This can place significant additional pressure on flexible workspace operators should the economy turn in the coming years. Operators that signed leases when the market was mid or high will have a harder time re-pricing their memberships without risking negative numbers.
Wary Investors
Up until about six months ago, investors were warming up to the industry.
Then WeWork’s S-1 document was released.
Following WeWork’s failed IPO even after it significantly cut its valuation, investors are more wary of the industry.
In a previous Allwork.Space article, we wrote that “investors might be more wary of providing funds to coworking operators in the wake of WeWork’s shocking drop in valuation and the billions lost by SoftBank from investing in it.”
A Cushman & Wakefield report published in December argued that “capital for the industry is looking slightly weaker, which will have ripple effects particularly on fundraising and due diligence.”
