Exit of two Canadian executives clouds WeWork expansion

This article originally appeared on the Globe & Mail website.

WeWork's top two Canadian executives have left the company, adding uncertainty to its expansion plans amid the upheaval surrounding its failed initial public offering and the demotion of its co-founder.

Two property experts had been hired to bolster operations in Canada and woo new business with landlords who had concerns about WeWork. Both resigned in August.

Wayne Jacobs was WeWork's Canadian head of real estate and business development for less than five months. Chris Bonneville was director of real estate management for Toronto and Montreal for about a year.

Mr. Jacobs, whose LinkedIn profile says he is a consultant, said his resignation "was right for me at this point in my career." Mr. Bonneville, who is now with WeWork competitor IWG PLC, did not respond to a request for comment.

It is unknown whether WeWork will replace the Canadian leaders or if property owners and leasing brokers will continue dealing with multiple managers in New York, Boston and Seattle.

The company declined to comment.

WeWork delayed its IPO over concerns about its lack of profitability, US$47-billion valuation and questions about co-founder Adam Neumann's drug use and conflicts of interests. Mr. Neumann was ousted as chief executive officer on Tuesday and replaced by two WeWork executives.

The IPO was supposed to give WeWork the funds needed to continue its rapid global expansion, including in Toronto, one of its fastest-growing markets. WeWork has a target of 20 locations in Toronto by next year. Currently it has 10 in the city, four in Montreal, seven in Vancouver and two in Calgary.

The New York based company, which leases office space and then subleases it at a premium for as short as a day, has never been profitable. In the first half of this year, the company lost US$900-million on revenue of US$1.54-billion, according to its securities filings.

Some landlords in Canada had problems with WeWork's aggressive demands, convoluted process of signing leases and the company's balance sheet.

WeWork required landlords to pay upward of $100 a square foot in tenant improvements to renovate spaces, The Globe and Mail has reported, which is higher than the typical allowance of $30 to $40 a square foot.

When the company hired the Canadian executives, it said it intended to be more flexible with new leases.

The turmoil surrounding the company will raise questions about the industry and make any expansion more difficult, said Ross Moore, a broker in Vancouver who works on co-working leases.

"Recent events around WeWork's now delayed IPO just confirms many landlords' skepticism, and will make future negotiations just a bit more difficult.

Not impossible, but definitely more challenging," he said.

"What I hear on a regular basis is: 'Let's see how flexible workplace operators fare during an economic downtown. Until we've been through a full cycle, I'm not going to open up my building to a new and untested concept that may, or may not, come out the other end.' " Mr. Neumann will remain as non-executive chairman of We Co., WeWork's parent company, which includes dorm rentals, early education and real estate acquisitions.

The quick demotion left landlords in the dark. Dream Unlimited, which will lease an entire building in downtown Toronto to WeWork, was not informed about the potential change in leadership ahead of the news breaking on Tuesday.

"We will deal with whatever happens," said Dream CEO Michael Cooper.

A number of Canadian entities already lease to WeWork, including retailer Hudson's Bay Co. and pension-fund-controlled Oxford Properties and Ivanhoé Cambridge. Ivanhoé was the first landlord to lease to WeWork in Canada with a spot in Montreal. Private commercial realtor Hullmark was the first to lease to WeWork in Toronto.

When asked if Ivanhoé had confidence in WeWork's ability to pay the rent, the real estate company said yes. "Co-working space is here to stay. It's been a disruptive business model for the industry; we want to understand it, and we want to participate in it," Sylvain Fortier, chief investment and innovation officer with Ivanhoé, said in an e-mailed statement.

Ivanhoé, which recently announced it was working with a We subsidiary to buy real estate assets, rents space to WeWork in Canada, New York, Denver and Chicago.

In Tuesday's announcement, WeWork said it would be taking "clear actions" to balance its high growth and profitability while also evaluating the optimal timing for a public offering.

"You are not off the hook by changing the leader," said Richard Leblanc, a corporate governance professor at York University in Toronto. "You have to change the culture and, in this case, which is much more difficult, you have to change the business model so that the revenue stream actually makes sense and it can be profitable," he said.

Shared and temporary office spaces have been around for decades. But Mr. Neumann and WeWork made them trendy. In less than a decade, WeWork expanded from one location in New York to more than 500 locations in 111 cities, according to its securities filings.