In Toronto’s Junction neighbourhood, the local outpost of co-working operator Spaces occupies part of a former warehouse. With a bright, airy design, wooden wall accents and minimalist furniture, it offers desk space, private offices and meeting rooms to companies that need to provide employees flexible work options.

Spaces The Junction is one of roughly 150 co-working locations across Canada owned by global giant IWG. With its Spaces and Regus brands, Swiss-based IWG has the largest network of co-working spaces in the country—with clients that include some of the world’s biggest tech companies—but it’s still scrambling to keep up with demand.

“Right now, we are in the middle of the storm,” said Wayne Berger, IWG’s CEO for North America and Latin America. “We’re in the middle of the single largest … structural shift in commercial real estate and in how, when, where and what people call work.”

It’s been nearly a year since most provinces lifted COVID-19 restrictions and five months since the federal government removed all pandemic-related travel rules. As the Canadian workforce slowly returns to the office, companies are increasingly looking for space suitable for hybrid work. According to a new report from the commercial real estate firm Colliers Canada, released Tuesday, demand for flexible office space will account for eight per cent of the total office demand, compared to six per cent predicted at the end of 2021. The real estate sector is now changing the way it works with tenants to cater to their changing needs.

The gap between where managers and employees want to work is contributing to the growing demand for flexible work spaces. “Businesses want their employees back in the office, certainly more than they are now,” said John Duda, president of real estate management services at Colliers Canada.

Nearly two in five managers prefer to be fully in-office compared to just one-fifth of employees, according to the report. Thirteen per cent of employees prefer fully remote work compared to just four per cent of those in management.

Berger thinks there are two reasons for the gap: one, many companies are still locked into leases they signed before the pandemic, and two, that current leadership climbed the corporate ladder in a different era. “They started their careers when … it was required for you to come to an office every single day. So, there is a romantic notion around mentorship, team building and culture that has to be done physically,” he said. “This idea of going to an office physically every day will frankly become a waste of money, and non-purposeful as generations continue to shift.”

About half of the 394 companies Colliers surveyed still hadn’t finalized post-pandemic work arrangements. It’s going to take 12 to 18 months before the impact on the real estate sector is known, said Duda, but in the meantime, flexwork spaces are booming.

In 2019, IWG fielded 30,000 inquiries about flexible office space in Canada, a record for the company at the time. In 2022 it had over 40,000 inquiries. In response, IWG started planning to increase its Canadian footprint, said Berger. The company aims to increase its number of locations to 250 and will open nine new locations in eight cities in the first half of 2023. As well as catering to small- and medium-sized businesses, IWG manages flexible workspace memberships for companies like Meta, Amazon and Deloitte.

With companies moving towards flexible work arrangements, office-vacancy rates in Canada rose from 11 per cent at the end of 2020 to 13 per cent by the end of 2022. IWG took advantage of this trend to fuel growth by partnering with building owners. The owners put up capital to invest in a space and pay IWG a management fee to operate it. Over the past year, 90 per cent of new locations came from partnerships, compared to five per cent pre-pandemic, said Berger. Under this model, Berger claimed property owners won’t have to worry about vacant space and have a higher return rate than traditional leases.

“We cannot keep up with the demand that continues to surge for flexspace,” said Berger. “So we see that as an absolutely perfect opportunity.”

While the long-term impact on commercial real estate is still playing out, there’s already been a shift in discussions between landlords and tenants, said Duda. One notable change has been in the number and nature of additional features landlords are offering tenants. There is a high demand for quality amenities from companies wanting to lure employees back into the office, said Duda.

“That really is a new dynamic, it’s interesting, and it helps to shape what choices are being made at the asset level. … It’s more tailored to what people are looking for,” he said.

Property management companies have engagement programs to make sure they’re meeting  a tenant’s specific needs. These include making it easier for employees to get into a building, such as by guaranteeing parking; and building social elements into offices, such as creating more space for meetings and daycares. IWG offers wellness packages to the employees of some of their corporate clients.

“It’s not just about their office space, it’s about ensuring they have accessibility to great fitness memberships… to food on site, great events, and everything they need from a health and wellness perspective both as a worker and as a person will be part of that IWG experience,” said Berger.

Converting traditional offices into flexible spaces will require investment and property owners will need to figure out how to recoup these costs from tenants, said Duda. “This is where the experimenting is going to come in, we’re going to see very different approaches for different types of tenants,” he said.

Whether tailoring to tenants’ needs or franchising co-working spaces, the increased competition from rising vacancy rates will continue to drive innovation in the commercial real estate market.

“Some people are putting in space, like IWG and WeWork, but there’s going to be much more variety going forward,” said Duda. “It’s going to depend on the type of tenants in a building, what they need and what kind of financial arrangement the owners can come up with to make it worth their while to invest. … I do think it will happen, it’s just going to take time.”