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Co-working provider Knotel Inc. has filed for creditor protection in the U.S., the latest flexible office company to be devastated by the COVID-19 pandemic.

New York-based Knotel’s filing for Chapter 11 bankruptcy protection is another sign that the shared office business is struggling to withstand a severe economic downturn that has most office staff working from home.

It comes after the world’s largest co-working provider, Swiss-based IWG PLC , filed for creditor protection for locations in Canada and the United States last summer. A much smaller rival, Montreal-based Breather Products Inc., also recently filed for bankruptcy protection in the U.S. and Britain, and said it would try to get out of its Canadian leases. Knotel says its U.S. bankruptcy filing does not include its international operations.

“Clearly, the pandemic has challenged the co-working model and brought lofty expectations for this sector down to earth,” said Bill Argeropoulos, head of research with commercial real estate company Avison Young.

The co-working business model involves taking out long-term leases in buildings, slicing up the space and subleasing it for shorter periods. Co-working companies profit as long as they can find enough subtenants. If subtenants don’t pay, a co-working company does not generate revenue to pay its leases and turn a profit.

Remote work has reduced the need for temporary space and driven down occupancy rates for co-working companies. Although real estate experts believe flexible office space will be in demand after the pandemic, it is not clear demand will be as high as before COVID-19.

“It appears co-working enterprises are having real difficulty coping with the ongoing disruption caused by the pandemic,” said Michael Emory, chief executive of Allied REIT, a major office landlord with tenants that include six IWG locations under the Spaces and Regus brands.

Mr. Emory said his IWG tenants have been paying rent throughout the pandemic. However, 39 of IWG’s Canadian office affiliates filed for bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA) last year. That includes Regus locations in British Columbia, Alberta, Manitoba, Ontario and Quebec, according to the filing with the Ontario Superior Court.

Knotel was one of dozens of co-working companies trying get established in the Toronto office market, which had a vacancy rate below 2 per cent before the pandemic – the lowest rate in Canada and the U.S.

As part of its restructuring, Knotel said it has a deal to sell its business to New York commercial real estate firm Newmark Group and plans to exit “multiple” U.S. locations.

Knotel has three locations in downtown Toronto, according to its website. The company did not respond to a request for comment on the future of its Canadian locations. Knotel’s Canadian landlords did not respond to requests for comment.

Although Knotel is restructuring in the U.S., it does not necessarily mean it will do so in Canada or that its Toronto locations are in trouble. Ottawa has provided rent relief, wage subsidies and forgivable loans for businesses hit hard by the pandemic.

David Bish, head of Torys LLP’s corporate restructuring and advisory practice, said it can take from 48 hours to one week for companies seeking U.S. creditor protection to have those filings recognized in Canada, or to file here under CCAA.

“We don’t know if the problems that [Knotel is] having south of the border are the same as they are seeing in Canada,” Mr. Bish said. “The Canadian operations may be performing better than their U.S. operations for a variety of factors, including government support programs.”

Nevertheless, the Knotel Chapter 11 filing is another blow to the co-working industry, which became all the rage in the years after the Great Recession when WeWork popularized flexible office space with its funky office spaces and free beer. WeWork has since scaled back its ambitions after its public offering failed in 2019.

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