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Adrian Joaquin, the founder and CEO of Workhaus which owns eight office-on-demand buildings in Toronto.J.P. MOCZULSKI/The Globe and Mail

The latest pandemic restrictions have thrown the battered co-working sector back into doubt just as office space providers were preparing for a surge in demand from companies shunning traditional multiyear leases.

For most of the COVID-19 health crisis, co-working and flexible office space providers such as WeWork, Spaces and The Workaround have struggled to attract and retain customers because of stay-at-home mandates.

The typical co-working company runs a rent arbitrage business, where it takes out long-term property leases, divvies up the space and subleases it for shorter periods. Co-working companies only make money if they find enough subtenants to fill the space. They have traditionally rented a desk or a small office space to workers looking for an alternative to a home office, as well as businesses with satellite offices.

Their popularity grew after the Great Recession of 2008-09 with the explosion of startups and self-employed contractors looking for temporary office space.

For a brief period in the fall and early December, office workers and businesses were again seeking space in co-working locations. But the ferocity of the Omicron variant of COVID-19 has prompted a new round of restrictions, halting the return to the office and putting co-working companies back on shaky financial footing.

“It happened overnight. We were sold out. We had a wait-list and then the capacity limits came down,” said Amanda Munday, the owner of The Workaround, a co-working and child-care facility in Toronto’s east end.

Her facility is now empty and her clients are backing out. “My e-mail inbox is full of people asking for refunds,” she said.

Ms. Munday has signed a multiyear lease for the office space and she said she is at risk of defaulting on monthly rent payments after her customers vanished overnight when the Ontario government announced the latest round of restrictions last week.

“It is just so awful. December was shaping up to be one of the best months of the pandemic,” she said.

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It’s a similar story for Workhaus, which has 12 locations in the Toronto area. Adrian Joaquin, the founder and chief executive, said demand had been increasing over the fall and he was getting inquiries from all types of businesses. There were calls from companies in financial services and health care, in addition to the tech sector which used to be his main type of client prepandemic. He said he had even received inquiries from massage therapists and physiotherapists.

Mr. Joaquin had expected some of those new clients to start subletting space in January. But now he said those plans are probably on hold.

“Up until last week, the interest has been enormous,” he said. “People were looking to commence in January. I don’t see them starting in January now.”

Mr. Joaquin and Ms. Munday have had to rely on the federal government’s rent subsidies and other financial support to stay afloat.

They are not the only co-working companies facing challenges. Since the pandemic started, New York-based Knotel and Montreal-based Breather Products Inc. have closed permanently. The world’s largest co-working provider, Swiss-based IWG PLC, filed for creditor protection for dozens of its locations in Canada and the United States, though has since restructured. WeWork, which made co-working trendy after the 2009 recession, scaled back expansion plans.

Over all, the number of co-working locations in Canada has dropped to 506 this year from 599 in 2019, according to data from commercial real estate services firm CBRE. However, the total square footage of co-working space in the suburbs has increased over the same period.

Many companies are reassessing how they use their physical office space given that their staff have mostly worked from home since March, 2020. Common users of office space, like financial services firms, say they will offer their employees the option to work from home for some of the week. Some companies are looking at co-working spaces as a lower-cost, commitment-free way to provide office space to smaller groups of employees.

“One of the biggest trends we are seeing from organizations is that they are giving their employees the ability to truly work flexibly and the ability to access an office close to work or close to their clients,” said Wayne Berger, IWG’s CEO for the Americas. IWG has about 120 locations across Canada under the brand names Regus and Spaces.

“We have seen many companies re-establish their headquarters at one of our locations and give their employees the ability to work closer to their home,” Mr. Berger said. “Structurally, this is the biggest shift we are seeing,” he said.

Like Workhaus, Mr. Berger said IWG has also been fielding inquiries from a wider range of businesses because they don’t know how much space they will need after COVID-19 restrictions are lifted and they don’t want to commit to a multiyear lease.

As well, IWG is getting more requests for its suburban locations, a shift from before the pandemic when companies were desperate for space in downtown Toronto and Vancouver. The two cities had the lowest office vacancy rates in North America in 2019.

Commercial real estate analysts say the shift to flexible work will fuel demand for co-working spaces.

“We think that the upward trajectory will resume,” said CBRE’s director of Canadian research Marc Meehan. “When and how quickly is dependent on a number of factors,” he said.

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