Co-working spaces have been a growing part of the Canadian office market in recent years, with established providers expanding and new companies entering the field to offer flex work solutions.
Will that growth continue following the COVID-19-induced, government-imposed economic shutdown the country now finds itself in, or will the experiences of the past two months permanently change the co-working business model?
This is Part One of a two-part article focusing on the effects of the COVID-19 pandemic on Canada’s office market. Watch for Part II Tuesday on RENX
That was a topic of discussion involving four real estate executives during an April 29 Canadian Real Estate Forums webinar.
IWG’s Canadian operations
Wayne Berger, the chief executive officer of the Americas for IWG, said all of its Canadian centres are open because they cater in part to clients engaged in activities deemed by governments to be essential services. Some small businesses and enterprises are also using these locations to receive mail.
Occupancy levels are very low, however, as most people work from home to maintain physical distancing regulations.
Berger said IWG decided in March to do what it can to support its clients, which range from individuals and small firms to large corporations: “We’ve had a tremendous amount of requests from across the country and globally for forms of relief, whether it’s deferrals or rent relief.”
IWG is a Switzerland-headquartered multinational provider of serviced offices, co-working spaces, business lounges, virtual offices, meeting rooms and video teleconference services that employs more than 10,000 at more than 3,300 locations in more than 110 countries.
IWG’s dominant brands in Canada are Regus and Spaces. Regus operates in about 40 cities. Fifteen Spaces locations are open in Toronto, Vancouver, Montreal, Ottawa, Victoria and Kelowna, and three more are on the way.
IWG is in the unique position of being both a landlord and a tenant, leasing its locations from building owners before renting that space to clients. Berger said IWG has been working with landlords to seek ways they can partner for the benefit of all involved parties.
Co-working office densities will have to decrease
Webinar moderator Stefan Teague, executive managing director and Greater Toronto Area market leader for Cushman & Wakefield, said large companies were attracted to co-working spaces to reduce their own office footprints and take advantage of the community concept they provide.
These shared spaces generally require higher densities, however, and Teague doesn’t believe that will appeal to the tenants of tomorrow.
Workers might be wary of such environments after having the COVID-19 physical distancing message hammered at them for months.
“Getting more people in there is a good, healthy business,” he said.
“But, if you can’t fit those people, it’s either becoming way more costly for companies to go in there and the value proposition is put in question, or is the business model of this dense, dense co-working facility just done?”
Teague said the recession brought on by COVID-19 will put some companies out of business or cause others to downsize, resulting in an increase in sub-lease space. That might be attractive to current co-working space tenants looking for cost savings and economical space.
Berger said there are misconceptions about co-working and flexible workspaces, pointing out 85 per cent of the space at Regus and Spaces is dedicated to traditional private offices.
Still, Berger acknowledged there will be a need for buffering space to reduce densities at all types of offices, not just co-working locations. Management of circulation space and exploring different ways of manoeuvring through space will also be on the table.
“We’re also seeing a real commitment to a higher degree of health, safety, cleaning and disinfecting in common spaces and office spaces,” said Berger.
Co-working flexibility will remain attractive
IWG is receiving requests for space in suburban locations and tertiary markets as large companies look to spread their employees across multiple locations to reduce the densities built into their traditional spaces, according to Berger.
“I think there will be an impact to the business model and profitability,” said Oxford Properties Group vice-president and head of the Toronto office Kevin Hardy.
“I think it will certainly separate the high-quality operators from an on-trend, launch-a-business-centre in a building and call it co-working (operator).”
However, Hardy said co-working rents were already pricing in flexibility, and he doesn’t know how the profitability co-working providers need will be maintained with just two-thirds or three-quarters of the revenue in less dense spaces.
Dream Office REIT (D-UN-T) chief operating officer Gordon Wadley is still bullish on co-working and said good operators can drive revenue through their ability to offer flexibility on term for clients as they strive to rescale or restart their businesses when the economy reopens.
Wadley believes international co-working providers will have an advantage as signs point to increased deglobalization, countries adopting protectionist trade policies, and reduced travel.
“It’s going to be viable for a number of their enterprise clients because they’ve already navigated these international markets. Companies like Wayne’s are well-positioned across the globe because they’ve done all the heavy lifting to secure quality space abroad.
“They’ve gone through all of the regulatory minutiae of negotiating market leases in foreign markets and they have multiple locations worldwide where these enterprise clients can simply plug-and-play and get to work.”
Hardy thinks a lot of less sophisticated and less well-financed co-working space providers may not survive and predicts consolidation in the sector.
Berger expects that as well, but thinks current conditions will speed the process up. This will present opportunities for IWG, which has operated in Canada for 20 years and accelerated its rate of growth over the past five years.