No matter how hard you look, you won’t find a new million-square-foot office tower on Toronto’s skyline, but the equivalent of that is there if you search closely enough below the horizon and have time to comb through 85 different locations across the city.
There, you’ll find a group of tenants that are neither building owners nor long-term leasers — the mainstays of commercial real estate. Instead, they are both startups and old economy companies such as banks looking for flexible space with flexible lease terms and a new type of atmosphere that doesn’t have cubicles and corner offices.
They are finding those terms in the growing shared space segment. It’s not a new concept — though Canada is a late adopter by global standards — but the Toronto market has almost doubled to one million square feet during the past two years, according to Cresa, a global commercial real estate company, based on what is publicly listed. Vancouver’s growth is similarly explosive with close to 750,000 square feet now in that market.
One of the behemoths of the industry, New York-based WeWork Inc. just opened up its first Toronto office building in the financial district over the summer and has plans to expand across Vancouver and Montreal, too.
WeWork has been valued as high as US$20 billion, with some estimates pegging it as the sixth-largest private property company in the world. Its chief executive said in an interview this summer that annual revenue is US$1 billion — and that’s without owning any actual real estate.
The shared-space model is a break from traditional real estate. WeWork and similar companies lease space from landlords and then effectively release it to what they call “members” — some committing to a specific space for a period of time and others just looking for the occasional free desk at various locations around the globe.
Cresa, which advised tenants on transactions totalling more than 50 million square feet in 2016, said most of the new companies in this niche industry joined in the past two years.
But companies such as WeWork and Regus — a Belgian company owned by IWG PLC that controls 50 per cent of the shared-space market in Canada — have been around for years.
“(Demand) has been driven by a rise in entrepreneurship, a rise in design industries. It’s just a change in workplace industries evolving,” said Sheldon DiCarmine Dobsi, a research analyst in Cresa’s Toronto office.
Some chalk up the growth to the shared economy model in which individuals are able to borrow or rent assets owned by someone else.
“The concept has been around maybe 30 years,” said Ross Moore, a senior vice-president at Cresa, based in Vancouver.
Although individual deals are smaller, Moore said half his calls now come from clients looking for shared space. “The shared-space market could eventually be 20 per cent of all (downtown office) real estate,” he said.
That level would be a far cry from today’s market. Toronto’s office market has about 150 million square feet of space so the one million taken up by shared-space arrangements doesn’t amount to one per cent of the market. The Vancouver market is 60 million square feet so the presence there is almost negligible, too.
But shared space is growing. Moore said 20 to 30 per cent of WeWork’s revenue comes from Fortune 500 companies. WeWork has even signed a major financial institution — it won’t say who — to take a chunk of space at its Richmond Street location near Toronto’s financial district.
WeWork’s first Toronto office, but second in Canada — it opened in Montreal about 18 months ago — is a restored six-floor brick building designed to bring lots of natural light in for members that use the location’s 1,000 desks.
There are immediate plans to open another building at Bloor and Yonge streets at the crossroads of the city’s two major subway lines.
“Toronto has this strong dynamic economy and a strong sense of local identity and it feels like a place where there is an opportunity to introduce this platform,” said Dave McLaughlin, general manager for WeWork East, which overseas eight different markets in the United States and Canada.
“The WeWork customer base is very heterogeneous. It encompasses the sole app developer trying to test something in the market and extends to Fortune 500 companies.”
The company’s selling point is that it allows for collaborations that actually deliver business to its member tenants, who get to participate in special on-site social nights and meet others in a lounge area that includes cold drinks and coffee to free beer on tap.
“You put a bunch of 20-something software developers together, there is value, but if you put them with service businesses and insurance or professional services along with people with businesses that started in, say, a different country, the network effect is much bigger,” McLaughlin said.
WeWork even goes to the extreme of making its hallways narrow enough that people have to “bump into each other,” thereby making social contact in some way, he said.
The company said a global survey it conducted showed that 70 per cent of its members say they collaborated with another WeWork member and 50 per cent did a transaction with another member.
McLaughlin said there are several reasons why even a bank would sign a lease for a location within walking distance of its head office.
“It could be a team that wants to be located in a different space and different culture. They might be thinking of the next generation of the business,” he said, adding some clients want access to the 130,000 WeWork members or just access to a community that might include a future client.
A basic WeWork membership is US$45 per month, which allows members to book space à la carte. A hot desk, which is guaranteed workspace in a common area at one location, starts at $275 per month while dedicated space, starting at $350/month, gives you a desk of your own in a shared space at one location and allows you to set up in the same spot each day.
Cresa said the average price of a dedicated shared space desk in Toronto is $483 per month and $288 for a hot desk. In Vancouver, that dedicated desk is $416 per month per user or $282 for a hot desk.
The company estimates those figures might be as much as 50-per-cent more expensive on a square-foot basis than traditional space, but that’s the price of flexibility.
“We are super bullish. Toronto, in the first building, opened at 100 per cent (capacity) and we have strong demand on the second building and it doesn’t open until the beginning of (2018),” said McLaughlin, whose company has about 10 million square feet under lease worldwide. “We think (Toronto) is a place we can grow a sizeable presence. It could be 10 times where we are already.”
Landlords in Canada are clearly watching the development of shared space, but it’s not like anybody is shaking in their boots. Many of them are more than happy to sign a long-term lease with a company such as WeWork or Regus and let them deal with finding tenants.
“This type of use has existed over the years. We have always had executive offices somebody has tried to operate,” said Paul Finkbeiner, chief executive of GWL Realty Advisors, which has 19 million square feet in office space and is one of the country’s major landlords.
“It may be they are just another tenant. In some cases, you might get more wear and tear because other people’s tenants are not your tenants,” he added. “It depends how many people they put in their space.”
Landlords, however, rarely want to get involved in smaller leases, so shared-space companies solve a potential headache for them.
“Do we really want to do 50 2,000-square-foot lease deals?” asked Finkbeiner, who has his doubts about whether the model is going to really take off. “This is not the saviour of the real estate industry and you have to be thoughtful when you put them in your building”
Finkbeiner also points out that larger clients such as the banks are always going to need space.
Wayne Berger, an executive vice-president at Regus, which was founded in 1989, and country manager for Canada, where the company has been in place since 2001, said it now has 102 locations across the country.
“I’ve never seen the industry have more relevance and excitement in the media, as well as in the eyes of VPs of real estate, startups and organizations,” said Berger, whose company continues to offer more traditional office space as well. “It’s just shifting with the workforce. I think the industry is early stage embryonic.”
Berger said data show that 47 per cent of Canadian workers are already working remotely for half the week. Two years ago, the most popular alternative to the office was a home office or a flexible workspace that was sometimes a business office, but more often than not just a cafe.
“You’d walk into a cafe and see individuals working remotely,” said Berger, who maintains workers are essentially social so they are gravitating back to a more formal sort of shared space.
James McKellar, an expert in real estate and infrastructure and a professor at York University’s Schulich School of Business in Toronto, doesn’t believe shared space will eliminate the traditional model for office leasing, but there is a cultural shift happening in the marketplace that the office sector can’t ignore.
“For the past decade, we had a culture where people said, ‘If I need it, I’ll buy it,’ and now we are saying, ‘I need to use it, but I don’t need to own it,'” said McKellar, adding that a long-term lease is the equivalent of “owning” a space. “It’s an age thing: older people don’t get it and younger people do.”
WeWork feels how people deal with their space needs is changing for the long term.
“It’s like so many things in our life that we used to purchase in one package and now purchase in a different package. We used to buy albums and now we stream songs. We used to buy a car and now you call an Uber,” McLaughlin said. “Our biggest competition is a past notion of work and work needs and how people think about these needs.”