Legal Real Estate Reaches a Tipping Point
Law firms have faced a relatively unforgiving real estate market since 2010: rents climbed 37.5 percent and finding prime space in the central business district of major cities was expensive.
Now, the tide is shifting as new construction provides highly anticipated breathing room, according to JLL’s 2017 Law Firm Perspective report. High-growth firms will start to shift into shiny new developments, providing a window of opportunity for other firms to negotiate deals for their old spaces. The fresh supply of office space will put new pressures on landlords, making the next 12 to 18 months a critical time for firms to re-evaluate their options.
HOW THE TIDE WILL TURN
The top six legal markets — Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C. — house more than half of the 65 million square feet of new office space in development. The influx of new space is hitting each market in different ways, giving law firms greater leverage in select spots.
One of the first markets to see more tenant-friendly conditions is Washington, D.C., where construction has reached its highest level in more than a decade. Rents are expected to shift downward over the next 12 months and concessions will continue to increase for new developments.
Boston sits on the opposite end of the spectrum. Law firms are often directly competing for space with the high-growth tech and life science firms saturating the region. In some cases, landlords are waiting to fill new developments with the right tech or life science occupants before opening the door to law firms. Competition will remain fierce in the Financial and Seaport Districts as law firms face a large wave of lease expirations.
Los Angeles will be another market slower to turn, with few options available in the highly popular Century City submarket where there is intense competition from tech and entertainment firms. Landlords will likely dictate terms for at least the next 12 months. However, in downtown Los Angeles there are numerous full-floor options available for law firms.
Offices must reflect the new way of thinking, with flexible spaces that can accommodate a variety of uses, encourage collaboration among different generations and help employees work more efficiently and productively.
Chicago and New York’s real estate markets fall somewhere in the middle of the scale. In Chicago, the migration of law firms from the suburbs to the city’s core shows no signs of slowing down, but two new trophy towers are providing some relief. As firms relocate into the new developments, it will loosen up vacancies in their old buildings. Rents are expected to flatten out over the next year, and landlords will likely increase concessions. New York is set to see millions of square feet of new office space hit the market through 2020, largely in the Hudson Yards and World Trade Center areas of the city. However, the new higher-priced spaces aren’t doing much to bring down rent. Both vacancy and rents will likely remain near current levels through the end of 2018 and beyond.
KEY FORCES SHAPING LOCATION DECISIONS
Specific market dynamics aside, several larger forces are influencing the decisions behind where law firms set up shop:
Battle for the best: Law firms face fierce competition for fresh talent, not only among themselves but among other industries. Millennials are now the largest generational group of lawyers at large and midsize U.S. firms. With law school enrollment dropping 24.8 percent since 2010, firms are staring down a shortage of talent to replace retiring partners. Major cities remain a beacon for talented young professionals eager to grow their careers, and firms will need to compete for these professionals with the technology realm, financial services and other professional services.
Desperately seeking efficiencies: Revenue growth is under pressure, from alternative legal services, weakening demand and staffing challenges. In the latest 2017 Altman Weil Law Firms in Transition survey of U.S. law firms, 94 percent said improved practice efficiency will be a permanent trend going forward. On the real estate end, firms have been actively downsizing office square footage as they try to save costs and provide more flexible space.
Think differently: One thing that is very clear in the rapidly evolving legal market is the need to think differently — from alternative pricing structures to new technologies that save time and money for clients. The same old approach has grown stale, and both employees and clients are shifting away from firms that aren’t willing to rethink their approach. Offices must reflect the new way of thinking, with flexible spaces that can accommodate a variety of uses, encourage collaboration among different generations and help employees work more efficiently and productively.
THE RIGHT TIME TO STRIKE?
As the real estate market nears its peak in many cities, the scale will finally start to tip in the favor of law firms. Landlords in nearly one-third of markets across the United States are providing 12 or more free months for tenants signing 10-year leases for new developments. Concessions for tenants in the central business district of cities are up more than 15 percent nationally and 33 percent in the top legal markets. Even if an immediate move isn’t in the cards, it’s an excellent time to evaluate new options and possibly invite landlords to the bargaining table.
About the Author
Elizabeth Cooper is an International Director of JLL and Co-Chair of the firm’s Global Law Firm Group and has negotiated more than 50 million square feet in law firm real estate transactions.