Office sector generally robust but co-working space providers facing a “double-edged sword”

Canada’s office sector should ride out the COVID-19 crisis better than most commercial real estate sectors, but the pandemic holds dangers for co-work companies that have both landlords and tenants to deal with.

“Demand for office space should see little direct impact from the coronavirus outbreak over the short term,” according to the Coronavirus outbreak: implications for commercial real estate report from Marcus & Millichap.

Avison Young, in its take on the effect of COVID-19 on commercial real estate, noted that the office sector “is set to embark on an unprecedented global experiment in flexible working.” The report said the pandemic will accelerate the adoption of new technology and flexible working practices, but it was inconclusive on the long-term effect of office towers shutting down and tenants trying to work from home.

The Canadian Internet Registration Authority noted in 2019 that the majority of Canada’s office workers have the technology to work from home occasionally, but only 20 per cent actually do so.

The sector that is most exposed is co-working companies, such as WeWork, Spaces Inc. and others that rent offices on a short-term basis.

COVID-19 represents a “double-edged sword” for co-work space providers, according to Marc Goffaux, chief compliance officer at Hawkeye Wealth Management of Vancouver.

“These companies lease office space at wholesale and lease it at retail [prices],” Goffaux said, which means they must deal both with a landlord and as a landlord.

WeWork, for example, has been criticized for charging rents during the COVID-19 crisis, but the company argues that it must negotiate its own rental relief from building owners.

Concerns about WeWork’s financial position have been building since last year, after founder and CEO Adam Neumann stepped down and the company’s valuation fell from $47 billion to $7.8 billion.

In a downturn, WeWork’s business model of renting short-term office space, while holding longer-term leases, is particularly vulnerable, analysts say.

The danger to co-working companies during a pandemic is that a majority of tenants will simply leave the space, since most of the leases are on one-month, even one-week agreements, Goffaux noted.

On the positive side, some traditional tenants shut out of office towers may turn to co-work providers for short-term offices, he added.

“It may turn out, long-term, that some traditional office tenants prefer the flexibility of short-term leases,” Goffaux said.

Avison Young cautions that the pandemic offers a unique problem for co-work space providers, which often promote the social aspect of their work environments.

“Social distancing could provide a stress test for many co-working operators, with short-lease customers opting to work at home for a period of weeks or even months,” the agency stated.