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Report on Business WeWork bends to landlord demands to secure office space as company plots Canadian expansion

Anu Jhajj, left, of #wecal and Grant le Riche share a table of Eighty Twenty, at the WeWork offices at 1 University Ave. in downtown Toronto.

Fred Lum/The Globe and Mail

At a dinner at Toronto restaurant Buca in January, WeWork executives convened many of the city’s top landlords to dine on fine Italian fare and to court their support for the office-sharing company’s aggressive expansion plans. Its message: WeWork will be more flexible with new contracts.

After irking the real estate community with long negotiations, requests for expensive renovations and seemingly inflexible demands over the past five years, WeWork wants to do business differently, including here in Canada. The dinner was an opportunity for the New York-based company to improve its relationships with its proprietors and convince other landlords of its merits as it plans a five-fold expansion in North America’s hottest office market.

WeWork, which is valued at US$47-billion, according to its latest round of fundraising, is in the business of leasing office space for upward of 10 years and then subleasing it at a premium for as short as a day.

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Although it has made inroads in Canada with strong demand from the tech industry, WeWork recognizes that it has to be more amenable and reduce its demands of landlords amid resistance from proprietors and increased competition.

“The conversation was about wanting to signal flexibility on how we approach deal terms,” said Dave McLaughlin, a WeWork general manager, who oversees Toronto among other cities in Canada and the United States.

The company launched in the aftermath of the Great Recession, when many businesses could not commit to long-term leases and as the labour market shifted toward temporary, contract work. Its founders had the vision – or luck – to start WeWork at what appears to be the right time. With its charming spaces, communal living rooms and kitchens with unlimited beer, it has attracted startups and other ventures that want flexible leases, as well as established businesses that want to tap into the tech community.

But as WeWork grows and lures mature companies such as Microsoft Corp. and Citigroup Inc., some landlords and brokers feel threatened by its dominance and see the company encroaching on their business of leasing space.

WeWork is also facing questions about its lofty valuation, ability to turn a profit and whether its business model can weather an economic downturn. It is up to WeWork to find subtenants so it can then turn around and pay the rent. But some landlords balk at its lease terms, which are often set up to protect the parent company from being on the hook if anything goes wrong, according to sources.

“It is a very false economy because you are very much at risk if the facility does not work. If that facility, for whatever reason, does not work, they can simply walk away,” said Michael Emory, chief executive of Allied Properties, which owns some of the most coveted office spaces in Toronto and will not lease to WeWork. “I wouldn’t have any objection to having WeWork in an Allied building. But I would never do that economic deal.”

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WeWork opened its first Toronto location in 2017 and will soon have seven co-working spaces in operation. It plans to have 20 by next year, making Toronto one of its fastest-growing markets.

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But competition for space is fierce. Toronto’s office vacancy rate is below 3 per cent and, with more and more tech companies and businesses relocating to the city, has been the lowest on the continent for almost three years.

Now, WeWork is collaborating with landlords to share renovation costs. Previously, the company asked landlords to pay upwards of $100 a square foot in tenant improvements to renovate spaces, according to sources, which is higher than the typical allowance of $30 to $40 a square foot.

“The context of the Toronto market means that we are not going to get the same tenant improvement that we get, for example, in New York,” Mr. McLaughlin said.

WeWork is also talking to landlords about revenue-sharing leases, as more property owners develop their own co-working spaces. Under a traditional WeWork contract, it signs a long-term lease with a property owner, subleases the refurbished space at a higher price and pockets the difference.

“Increasingly what we are seeing around the world [is] landlords who have the appetite to be in a revenue-sharing business with us,” Mr. McLaughlin said.

The company has hired a broker to head its real estate business in Canada and the United States, as well as a Toronto-based broker, Chris Bonneville, to deal with landlords. Previously, the lease negotiations were primarily handled through a U.S. contact, Rudy Mangino, who is no longer with the company. Both men did not respond to requests for comment.

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WeWork co-founder Adam Neumann is also reaching out directly to property owners’ CEOs, as the company did when it wanted to secure a deal with real estate trust Dream Unlimited for a building in Toronto’s financial district, according to sources.

“When large multinational companies want to reach out to their landlord partners, it is always a good thing," said Aly Damji, senior vice-president with property owner Hullmark. "I look at that as a very positive step and probably a good sign that they are taking this market very seriously to grow in.” Hullmark was the first property owner to lease space to WeWork in Toronto, and Mr. Damji said the two companies have a positive relationship.

WeWork now falls under the umbrella of the We Company, which includes education (WeGrow) and housing (WeLive). But the main business is the office-sharing unit with a valuation more than 15 times that of the world’s biggest co-working operator, Zug, Switzerland-based IWG PLC.

After starting with one location in New York nine years ago, WeWork now has 425 in 27 countries. Despite that growth, the company continues to lose money, according to recent U.S. media reports. In order to continue with its global expansion plans, it needs lots of capital. Earlier this year, its biggest investor, SoftBank, reduced its planned investment to US$2-billion from US$16-billion.

Still, WeWork has inspired dozens of smaller competitors. In Toronto, there are now more than 30 co-working operators, according to commercial realtor Cresa.

WeWork, meanwhile, is plotting more growth in Canada. It has been eyeing Ottawa and Calgary as new markets. In Vancouver, it’s close to securing locations outside the downtown, according to people familiar with the matter. Spokespeople for WeWork said the company had nothing to announce about new locations in Canada.

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