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Co-working firm to open shop in retail space

WeWork's takeover of a Manhattan department store exemplifies how shared offices have moved into prime real estate from the fringes. It also announces an emerging group of players in the commercial real estate market

While unbuttoned, the work environment at WeWork’s Toronto facility on Richmond Street West retains a professional aura. Tenant businesses pay membership dues and the amenities aim to show investors and clients how serious their enterprises are.

The misconception is this: Co-working office spaces tend to be minimalist, brick-and-beam nooks on the hip edge of downtown, a step up from working on a laptop at Starbucks.

They are instead increasingly prime, central real estate, and the most recent ostentatious display of this is co-working office operator WeWork's agreement last week to purchase and convert Lord and Taylor's flagship store in Manhattan.

The building will be turned into WeWork's new New York headquarters, as an obvious, glittering marker of the co-working office segment's explosive growth. The bottom floors will be rented back to Lord and Taylor, owned by Toronto-based Hudson's Bay Co., which will operate a scaled-down version of the original store. The conversion of the building is slated to begin at the end of the 2018 holiday season.

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WeWork has 170 locations in 56 cities globally, including Toronto, where its beachhead is in the core at 240 Richmond St. W. Among the company’s next Toronto moves is leasing the top floors of Hudson’s Bay Co.’s anchor store on Queen Street.

Yet, a side aspect of the WeWork deal is seen as even more telling, while also leaving some real estate watchers scratching their heads.

WeWork also said it plans to lease the top floors of the Bay's anchor stores on Queen Street in Toronto and Granville Street in Vancouver, and to turn those floors into co-working spaces. One prominent office property salesman said it's too soon to gauge the potential impact on the sector, given that the actual sizes of the co-working spaces haven't been announced. WeWork appears to have indicated to insiders that it has not yet formalized its plans.

Clearly, however, the company is forming partnerships to add to the services offered to its clients, or members, as they are called.

Artwork in the foyer of the WeWork building at 240 Richmond St. W. in Toronto sets the tone.

WeWork, for instance, has already announced a partnership with Royal Bank of Canada, which occupies an entire floor of WeWork's Richmond Street West location in Toronto. The idea of the partnership is partly for RBC advisors to become immersed in the co-working culture in case they just happen to bump serendipitously into some entrepreneurs and businesses needing advice.

WeWork's chief executive officer and co-founder Adam Neumann – whom one WeWork insider describes as a "hard charging, intense, brilliant, incredible salesperson, incredible entrepreneur," in other words, a visionary type – indicated in the announcement of the deal with HBC that he sees WeWork as having closer contact with retail, converting prime retail real estate spaces that retailers may be looking to relinquish. WeWork has already expanded into the furnished-apartment sector with WeLive.

"Retail is changing and the role that real estate has to play in the way that we shop today must change with it," Mr. Neumann said. "The opportunity to develop this partnership with HBC to explore this trend was too good to pass up."

Traditional office and desk space at WeWork’s Richmond Street West outlet in Toronto is complemented by a funky lounge and hip vibe, hallmarks of co-working spots.

HBC was more succinct. It's about driving "additional traffic to our stores, particularly as we add co-working and community spaces to existing, vibrant retail locations," HBC interim CEO Richard Baker said in the same press statement.

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WeWork has a particular niche in the co-working office sector, offering what it describes as premium amenities, such as a front desk to announce visitors, networking events and a certain hipness factor. Its recently opened downtown Toronto building has arty decor and free-flowing beer in the kitchen. (Regardless of beverages though, there's no mistaking that this is anything but a work environment, with people buried in their laptops, as in any office space. Businesses pay membership dues and the amenities, in part, impress investors and clients to show how serious their enterprises are.)

These are also businesses and startups that can afford the perks. Roughly a third of WeWork's members, renting anything from communal space to private offices, are larger companies of 1,000 or more employees. Some of these clients are, for instance, employees of a larger company needing to set up a branch office.

What would a co-working space be without free-flowing beer in the kitchen?

Behind all of this is the growth of the gig economy – all the consultants and freelancers, entrepreneurs and solopreneurs need office space. Estimates are that a quarter to a third of the Canadian work force alone are gig workers. Real estate service company JLL, meanwhile, predicts that by 2030, 30 per cent of corporate real estate holdings will be flexible office spaces, from co-working offices to incubator spaces.

WeWork, with more than 170 locations in 56 cities globally and 150,000 members, sees itself as competing less with smaller, independent co-working spaces that dot downtowns. It sees itself competing more with traditional office landlords, yet providing more lease flexibility and access to other office space internationally.

"Now you have this other option, which is really attractive and efficient. You can effectively stream your [office] space," said Dave McLaughlin, general manager for We Work East. Note the comparison to "streaming" technology.

In addition to phone booths for private conversations and work, WeWork’s Richmond Street West facility has other amenities such as a front desk to announce visitors.

Wayne Berger, executive vice-president and country manager in Canada for industry giant Regus, which has 3,000 locations including 103 in Canada, sees co-working space becoming more of a distinct asset class within real estate. He said that more partnerships with traditional landlords are likely, and that the conversion of available retail property into co-working space is an obvious opportunity, especially in key urban centres.

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"I think retail is a brilliant evolution," he said. Co-working providers are looking for prime property, while retailers are considering unloading it.

Christine Andrews is also unconcerned about these very large shifts in the sector and looming competition. She founded and operates the co-working space Acme Works, located near Toronto's Queen Street West corridor, west of the downtown. "There are definitely new players that we haven't necessarily seen historically who are suddenly getting very engaged, but I still think there's huge opportunity for growth across the board," she said.

Roughly a third of WeWork’s members, renting anything from communal space to private offices, are larger companies of 1,000 or more employees. Some of these clients are, for instance, employees of a larger company needing to set up a branch office. At the Toronto building, RBC staff are among the tenants.

Smaller independents have a different feel and different niche. She prefers not to say it feels less corporate, but rather more authentic.

"Whenever people come into my space, I actually encourage them to go and check out other spaces, because I want them to be happy with co-working. Because every space is different – some are more corporate than others – it's important that they find a place where they feel comfortable and that's right for their brand and their business," she said.

"There is still a huge opportunity for us to drive awareness and to grow the actual category. We don't need to fight for market share among each other," she added.

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