A deal between one of Canada's oldest retailers and a fast-growing U.S. startup that wants to convert portions of its flagship stores into shared offices is the latest evidence that coworking spaces are increasingly hot properties – and demand for retail real estate is cooling.
This week, Hudson's Bay Company (TSX:HBC) sold off its storied Lord & Taylor property in the heart of New York City to a joint venture between WeWork Inc., the largest provider of coworking spaces, and private equity firm Rhone Capital.
As part of the $1.6 billion deal, HBC will also lease out office space in its other locations, including floors of its downtown Toronto and Vancouver stores.
It's a manifestation of technology's impact on the economy, with consumers increasingly moving to online shopping and away from big stores and a workforce no longer tied to a static desk and looking to coworking spaces – which offer shared amenities and spots for lease on a short-term basis.
WeWork, a startup founded in 2010 which now has more than 150,000 members in 56 cities, has been capitalizing on this shift at a breakneck pace, doubling its customer base last year. The New York-based startup raised $760 million in funding in July with a valuation of roughly $25.6 billion, according to Forbes, which would make WeWork the fifth-most valuable tech startup at the time.
"There's lots of change in the economy, and the availability of solutions that give people greater flexibility, and a greater opportunity to connect with other like-minded folks and collaborate is something that people are really responding to," said Dave McLaughlin, WeWork's general manager of east U.S. and Canada.
The rise of coworking spaces reflects the increasing "disconnection of work from having a job," says Tsur Somerville, a senior fellow at the UBC Centre of Urban Economics and Real Estate.
"Instead of joining a company, working in the company and working your way up, there are a lot of people who work on contract basis," he said. "This a way for them to have a professional space, but without the ... commitment."
Even before the Lord & Taylor purchase, WeWork was the 11th-largest tenant in New York City, with roughly 197,000 square metres, surpassing Goldman Sachs, according to a PwC report on real estate trends released Thursday.
The New-York based company already has locations in Vancouver, Montreal and Toronto (with a new location due to open soon). But the ability to tap HBC's retail footprint and its prime locations across Canada will allow WeWork to extend its reach more easily, said Roberto D'Abate, a vice-president in PwC's real estate division.
"It gives them an excellent facility to expand very quickly into the marketplace," he said.
McLaughlin would not comment further on its deal with HBC. However, he said that WeWork sees plenty of demand for the company across the country.
"There is opportunity in other cities, but for right now, our focus is principally on those, on Toronto, Vancouver and Montreal for the time being," he said.
Coworking is probably the "strongest growing trend in the office market," including in Canada, says D'Abate.
Beyond WeWork, there are several independent coworking spaces which cater to different niches, such as technology or arts. It is not just the domain of startups and freelancers, as WeWork's customers include the likes of Microsoft Inc. and Samsung Ltd.
Coworking spaces allow large companies to avoid committing to a typical 10-year-plus lease, which is costly to get out and can limit future moves, said Queen's University professor John Andrew.
"It really handcuffs their use of space," he said. "Whereas this kind of flexible space, especially the way a lot of people work today with telecommuting and a lot of travel, this really can give a lot of flexibility."
It also allows companies to test the waters in a new location or have access to office space in multiple locations. For example, Microsoft's partnership with WeWork announced in November 2016 gives its employees access to WeWork spaces globally.
The open concept work environments, with living-room style common areas and perks such as micro-roasted coffee, craft beer on draft and social events, also appeals to the sought-after millennial workforce, which has surpassed the Baby Boomer generation in size, said D'Abate.
"Everyone is chasing that younger millennial workforce. And the way to do it is to have these open concept spaces, services, coffee shops... All those sort of creative incentives for people to come work for them."