American co-working giant WeWork is expanding into property acquisition and management, raising US$2.9-billion from Canada’s Ivanhoé Cambridge and other investors to buy real estate in major cities around the world.
The U.S. company announced on Wednesday a new asset-management unit, called Ark, that will use US$1-billion capital from Ivanhoé along with about US$1.9-billion from other investors to buy and develop commercial property in big urban centres such as Toronto, London and Paris. WeWork will then lease that space.
The decision to launch Ark marks a strategic shift for the co-working business and its parent The We Co. Until now, it focused largely on subleasing office space rather than owning commercial properties. But the nine-year-old company is losing money as it adds more office-sharing locations in more than 27 countries, including Canada, underscoring the need for new revenue streams.
The privately owned business is contemplating an initial public offering to fund future growth. Its path to an IPO could be more difficult after weak performance from recent IPOs by ride-hailing startups Uber Technologies Inc. and Lyft Inc., which also both went public despite being unprofitable.
“We think the opportunity is significant,” said Ark’s managing partner Richard Gomel.
For Ivanhoé, the real estate company owned by Caisse de dépôt et placement du Québec, the investment in Ark is a big bet on shared office spaces and The We Co. brand.
Under the terms of the deal, a portion of Ivanhoé’s capital will be used to start Ark Masterfund. Ivanhoé will have an investment in that fund and the Canadian company will work alongside Mr. Gomel’s team to buy properties that will eventually be leased back to WeWork and other We Co. businesses. Ivanhoé expects to profit from the rent and any appreciation in the real estate.
“Very rarely do you see a tenant and owner buying together,” said Sylvain Fortier, Ivanhoé’s chief investment and innovation officer.
Ivanhoé was the first landlord to open a WeWork location in Canada and now rents its space to WeWork in New York, Denver and Chicago. The Quebec company, which manages more than $65-billion in real estate assets in the Americas, Britain, Australia and China, also leases space to other office-sharing operators such as Breather, Spaces and Convene.
“We don’t think it is a passing trend. We think collaborative space is only going up,” Mr. Fortier said. “We have to be humble and recognize that is not our expertise.”
Ark could buy anything from mixed-use buildings to office towers, including properties that WeWork already leases.
Ark builds on The We Co.’s relationship with private-equity firm Rhone Group, which in 2017 provided WeWork with major capital to acquire the main Lord & Taylor department-store property in Manhattan.
Mr. Gomel said having the US$2.9-billion in equity to buy properties will help other parts of The We Co. grow.
“We have not had a demand problem, we have had a supply problem, getting access to physical space. [Buying properties] would help that,” he said.
There are about 25 employees dedicated to Ark, including commercial-property veteran Wendy Silverstein. Mr. Gomel, who used to work for real estate investment company Starwood Capital Group, will report to WeWork founder Adam Neumann.
The new asset-management unit is called Ark because it invoked the “idea of a strong vessel that can ultimately weather all storms,” according to Mr. Gomel. It will be the fourth pillar for The We Co., which developed out of its main business WeWork and also includes WeLive and early-childhood-education project WeGrow.
There are now more than 400 WeWork locations around the world and it is one of the biggest tenants in New York and London.
Its business model revolves around rent arbitrage, where WeWork signs long-term leases and then subleases the same space at a premium for any amount of time, usually to tech startups and other entrepreneurs.
However, the company has yet to turn a profit and analysts have questioned its US$47-billion valuation.