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Despite the WeWork IPO turmoil, whose offices in Toronto on University Ave. are seen here on March 19, 2019, shared office industry expands across Canada because of booming gig economy and tech sector

Fred Lum/The Globe and Mail

The amount of office space dedicated to co-working in Canada has quadrupled in the past five years, although it’s still a small slice of the market, and the high-profile troubles at WeWork could slow the pace of expansion.

Thanks to the rise of the gig economy and a flourishing tech scene, co-working companies account for 6.1-million square feet of office space compared with 1.5-million square feet in 2014, according to a new study from commercial realtor CBRE.

That number is expected to hit 7.4-million square feet across 508 locations next year, representing 1.6 per cent of the total office space.

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“We haven’t seen a new type of office tenant emerge with such speed and dominance since the dot-com boom,” said Paul Morassutti, vice-chairman of CBRE Canada. However, unlike in the early 2000s, when the dot-com bubble burst, Mr. Morassutti said the current flexible office space concept is fundamentally strong.

“We think the value for flexibility is very real. Occupiers put a lot of weight on it. In a world that is full of economic volatility … the need for space that tenants can move easily in and out of, we think there will continue to be a market for that.”

Co-working has been underpinned by the increase in startups and tech companies, many of which don’t know how much space they will need in the future and want to be able to change it quickly.

Toronto, Vancouver and Montreal are the three largest co-working markets in the country. Toronto has 3.1-million square feet, more space than the tallest office building in the country, the 72-storey First Canadian Place tower in the city’s financial district.

Mr. Morassutti said the co-working expansion will likely slow in Canada after WeWork’s setbacks. The company has never made a profit in its nine-year existence, and was forced to withdraw its initial public offering on Monday. It has said it plans to slow its global expansion to concentrate on fixing its balance sheet.

“The attention that it has received is clearly something that landlords are aware of and when you look at the type of growth we have experienced, it makes sense that it will moderate going forward,” he said.

The WeWork situation has highlighted risks associated with the rent arbitrage business. Co-worker providers such as WeWork take out a long-term lease in a building, slice up the space and sublet at a premium. If the co-working provider cannot find enough subtenants, it may not be able to pay the rent in tougher economic times.

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“WeWork has highlighted some concerns, but it is not an indicator that a catastrophe is in the offing,” Mr. Morassutti said.

Before WeWork’s failed IPO, the New York-based company inspired dozens of real estate companies and businesses such as retailer Staples to launch co-working outfits.

In addition to WeWork’s 23 locations in Canada, Swiss-based IWG is expanding quickly here. IWG now has three-million square feet across 133 locations in 42 cities in Canada.

Most co-working companies have yet to face a major recession. One exception is IWG’s Regus brand, which filed for bankruptcy protection in the United States after the dot-com bubble burst.

But the labour market has changed, and most co-working businesses say offering flexible leases may actually protect them in a recession.

“I believe that people look for more flexibility in a recession,” said Kane Willmott, who co-founded iQ Office Suites in 2012 and now has nine locations in Canada, including four in Toronto. “We really focus on what are the best possible locations. There is a flight to quality."

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Unlike WeWork, which used investor funds to expand to more than 500 locations in about 100 cities around the world, Mr. Willmott said iQ’s growth was “fuelled by profits reinvested into the business.”

Other cities are also seeing increased interest in co-working. CBRE says Calgary and Ottawa nearly doubled their co-working space over the past two years. The number in Edmonton climbed 45 per cent and in the Waterloo region more than 30 per cent in the same period.

And the CBRE study also shows co-working growth in suburbs.

However, the barriers to entry are low and the industry is growing more competitive. Canada has 206 co-working companies today compared with 50 in 2014, according to CBRE.

“This is now a highly competitive landscape,” said Stuart Barron, lead researcher for commercial broker Cushman & Wakefield in Canada. “As market fundamentals change, rising vacancy will put pressure on co-working companies, who will increasingly compete on price, and further, landlords will offer their own flex solutions.”

WeWork has told at least one Canadian landlord it plans to continue expanding in Toronto. The company has not said anything about other cities.

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