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Canadian landlords who lease to WeWork or have been negotiating with the company are starting to make contingency plans as the indebted co-working giant races to slash costs and restructure its business after a failed IPO.

Property owners have been calling WeWork’s competitors to see if they would be interested in their space if the company is unable to pay the rent, according to people in the commercial real estate industry. Some landlords who had been negotiating new leases with WeWork have halted talks. Others are putting a pause on any new co-working leases as they wait to see how WeWork’s troubles affect the office market.

Some landlords and their representatives have been looking to Swiss-based IWG PLC, which has operated shared office spaces for three decades and has about 3,300 locations, including 133 in Canada.

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“I have been contacted by both landlords and real estate brokers of existing WeWork locations, as well as possible future ones,” said Colin Scarlett, a broker with commercial realtor Colliers International who handles IWG’s leases in B.C. “Every owner of real estate is trying to understand the risk, and every occupant of WeWork is trying to understand the risk. ... It starts with a question for me and leads to – if something were to happen, would IWG be interested,” he said. IWG declined to comment.

“We are seeing WeWork customers come to Convene and a lot of landlords are reaching out to us,” said Ryan Simonetti, chief executive of the New York based co-working company, which has locations in the United States and is looking for space in Toronto.

“We are getting a lot of inbound requests from building owners that want to talk, and the advisers that represent them are reaching out to us to say: ‘Hey, if WeWork walks from this deal, or if WeWork shuts down this location, what can the landlord do? What should we be thinking?'” Mr. Simonetti said.

Oxford Properties, a pension-fund-owned real estate company that has WeWork leases in Toronto and Boston, has stopped doing deals with WeWork and put a hold on new co-working leases, according to two sources familiar with the matter. The Globe and Mail has granted confidentiality to the sources because they were not authorized to speak publicly.

Oxford spokesman Daniel O’Donnell said in an e-mailed statement: “We continually review the mix of customers within our buildings. A key part of that process is to regularly assess the performance and strength of specific industries, including co-working, which is currently only a very small part of our overall portfolio."

WeWork’s rapid deterioration has reverberated through the commercial real estate industry. In just two months, the company has gone from a US$47-billion valuation and the prospect of a successful initial public offering to a failed IPO and a financial bailout by its largest investor, Japanese conglomerate SoftBank Group Corp. WeWork now has a valuation of US$8-billion, according to Pitchbook.

Its fall from grace has some questioning its rent-arbitrage business model and the future of co-working. WeWork, IWG and other office-sharing companies take out long-term leases, slice up the space and sublease it for shorter periods. The co-working company charges a premium for the flexible space, and expects to profit from the price difference.

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A co-working provider earns a profit as long as it has enough subtenants. If it can’t make the location work, its landlord could eventually be stuck with a co-working company that cannot fulfill its lease. WeWork, IWG and other co-working providers often create special purpose entities, or separate companies, for their individual leases. This protects the parent if a location is unable to pay the rent.

“It is not necessarily in the landlord’s interest," said Brett Miller, the CEO of Canderel, a Canadian property owner and manager. "I think the model is challenged, especially if the risk is pushed onto the landlord.

“Canderel does not lease to WeWork. I would very much want to protect our interests. ... I have concerns about the model," Mr. Miller said, adding that he is not opposed to flexible office space in general.

WeWork’s rapid expansion from one location to more than 500 in nine years has left the company with US$47.2-billion in lease obligations, according to WeWork’s regulatory filings. Meanwhile, WeWork’s subtenants can lease space for periods as short as a month.

In the first half of this year, the company lost US$900-million on revenue of US$1.54-billion, according to the filings.

Although SoftBank this week provided WeWork with US$5-billion in financing, its future is uncertain. WeWork, which made co-working trendy with its communal spaces and free beer, is shedding assets and expected to slash thousands of jobs. It is the second-biggest co-working provider in Canada after IWG.

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“Landlords are either pulling back from WeWork, or questioning, or asking for more collateral, which is not available,” said Mark Rose, CEO of commercial realtor Avison Young.

Commercial real estate experts said the risk is less for property owners such as Ivanhoé Cambridge and Hullmark that signed deals with WeWork years ago and are in coveted locations in downtown Montreal and Toronto. Hullmark’s property, which is co-owned with Ontario College of Art and Design University, is teeming with subtenants. Both companies could easily fill their space.

The risk is higher for property owners that have recently signed WeWork as a major tenant and are starting to build or refurbish the office.

“Any building that has a commitment in the future, there is simply more risk associated with it," Mr. Scarlett said. "[WeWork has] limited access to capital now, and it is just a question of where they are going to allocate that capital and do they have any capital.”

BentallGreenOak, a global real estate company owned by a Canadian insurer, signed WeWork as one of its major tenants in a 32-storey office tower in downtown Vancouver that is not yet built.

The property, called B6, is due to open in 2023. According to data from Cushman & Wakefield, more than a dozen new office buildings will have opened by then. BentallGreenOak said B6 is a state-of-the-art, highly sustainable building designed to attract all tenant classifications. “We have obtained substantial commitments for tenancy at B6, and those commitments remain intact,” Tony Astles, the company’s head of Canadian real estate services, said in an e-mailed statement.

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A day after the rescue was announced, SoftBank chief operating officer Marcelo Claure, now also executive chairman of WeWork, tried to reassure employees that there were no more cash flow issues and that the company would focus on building its original business of co-working.

“This was a race that we were winning, and then suddenly it’s like we’ve lost momentum and it’s hard to regain that momentum," Mr. Claure said, according to a transcript of the meeting leaked to Vox. "We’ve got to regain the trust of those corporate customers who are going to think twice, ‘Do you really have the financial means?’”

WeWork did not respond to requests for comment.

The company’s problems have caused landlords to take a step back from co-working and consider different business models.

“We are probably not going to be entertaining offers from co-working users for the next six to 12 months until we see the full implications of what’s going on in that market,” said Michael Emory, CEO of Allied Properties REIT, who refuses to lease to WeWork.

iQ Office Suites, which has nine locations in Canada, is moving from a rent-arbitrage model to a partnership format in which a landlord would share the upside and risks with the tenant. Such leases are common in retail, where the landlord will get a percentage of gross sales.

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“We are looking at doing that model,” iQ CEO Kane Willmott said. “It is really the future of our business.”

One of WeWork’s landlords said he was not concerned about the company. Earlier this year, Aspen Properties Ltd. signed a lease with WeWork for five to six floors in one of its office towers in Calgary, which has a high vacancy rate due to the oil downturn and a glut of new space.

“Aspen’s view is that WeWork has a great future and they will get it right,” Aspen executive chairman Scott Hutcheson said. He would not disclose the terms of his WeWork lease.

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