Questions continue to swirl about one of the co-working industry’s giants, but one thing is not in doubt; the flexible office workspace sector has exploded across Canada, quadrupling its footprint since 2014 according to new research by CBRE.
Canada’s inventory of co-working space grew by 4.6 million square feet during that time, according to CBRE Canada’s inaugural Canadian Flexible Real Estate Report, expanding from 1.5 million to 6.1 million square feet. Another 1.3 million square feet of flexible real estate is slated to open across the country in the coming years.
The new data arrives as WeWork, one of Canada’s largest shared office providers, faces an existential crisis.
The explosion of co-working has coincided with the growth of Canada’s tech sector, said CBRE Canada vice-chairman Paul Morassutti.
Technology tenants today, whether start-ups or giants such as Amazon or Apple, want to be able to set up, expand or retract quickly in markets, he told RENX in a telephone call.
“It’s harder to do that in a traditional lease structure, and so the growth of the technology sector throughout North America, I think, is very closely tied to the growth of the flex space phenomenon,” he said.
Co-working brands like Regus and Spaces, owned by International Workplace Group, and the recently troubled WeWork have disrupted the “onerous, opaque, extended leasing process,” Morassutti said.
Co-working condenses leasing process
Office leasing used to require a number of professionals and several months to arrange.
“Instead of a six-month lease journey, you could come in, put down your credit card and begin working almost immediately,” he said.
Co-working companies accounted for four of the 10 largest office deals in Canada over the first half of this year, including the largest deals in Vancouver and Montreal, the report said.
The next wave of flexible office space has already committed to leases in new buildings currently under construction.
The drive for more space by co-working brands is continuing to drive down vacancy rates in Canada’s already-tight office market. Toronto’s downtown office vacancy dropped to 2.3 per cent in the third quarter of 2019, a record low, the report said.
In Vancouver, co-working accounts for 1.7 million square feet of office space, or 3.3 per cent of the region’s total office stock.
WeWork turmoil raises questions
WeWork is Metro Vancouver’s largest player, with a footprint of nearly 700,000 square feet across nine locations, with plans to open another 400,000 square feet.
However, WeWork and parent The We Company have continued to earn headlines for turmoil within upper management and its financial situation.
The New York-based co-working giant saw co-founder and CEO Adam Neumann resign in September, and has also shelved its anticipated IPO.
Large investors had been raising questions over the company’s ongoing financial losses and its overall business model during the final months of Neumann’s leadership.
The Financial Times also reported in September that WeWork will be halting all new lease agreements as it tries to stem its losses, although the company has made several statements to ease the concerns of building owners and managers.
“They have garnered so much media attention over the last few weeks, (and that) almost speaks for itself,” Morassutti said, noting he is limited in what he can say because CBRE and WeWork do business together.
“I think you’re going to see a slight moderation in their growth,” he said. “I think you’re going to see landlords perhaps recalibrating how they look at co-working in general. I think increasingly, you’ll see landlords say, ‘Is this the best model to facilitate co-working?’ ”
Co-working model still evolving
He said co-working, despite its major growth, still only accounts for 1.6 per cent of Canada’s office inventory.
“If it all fell apart tomorrow, we can deal with it,” he said. “It’s not going to cripple the office industry.”
If co-working brands started to default on leases, many of those would be at rents lower than today’s asking prices.
“The office market is incredibly tight,” he said. “I don’t think there are too many landlords that are sweating out there about the prospect of maybe taking back space if they had to.”
Morassutti said co-working remains an industry in its infancy, having only experienced mega growth starting about five years ago.
“But, as this new industry continues to evolve I think you will see consolidation . . . you’ll see some failures. You’re going to see an evolution that is part and parcel of any new and innovative industry.”