Efficiency is the name of the game for law firms today, especially, as they are taking their real estate in some interesting new directions. Across the country, rents for trophy and Class A office space—the traditional law firm stomping grounds—are rising 2.5 times as quickly as the average asking rents for the overall market and occupancy levels are at record highs. Even though the legal market is seeing revenue growth again, slowing demand for law firm services and memories of the post-2008 legal sector retrenchment have firms tightly managing their operations.
Properties in submarkets and micromarkets with greater availability at the edge of central business districts are attracting both law firms and office developers, according to JLL’s latest Law Firm Perspective report. Availability and improved efficiency are the primary motivators for moving off the beaten path. Some law firms, like companies in many other sectors, also see proximity to work-live-play urban neighborhoods as a draw for the next generation of workers.
New digs in new locations
A look at leasing activity inside the major law firm markets of New York City, Washington, D.C., Chicago and Los Angeles offers a glimpse at the subtle location shift underway. These four markets represented 50.5 percent of the national total for law firm leasing activity during 2014. In New York, some of the big law firms have shifted away from the traditional Midtown submarkets of Times Square, Grand Central and Plaza District to the western edge of the city.
For example, developments in Hudson Yards have attracted big names like Skadden, Arps, Slate, Meagher & Flom, and Boies, Schiller & Flexner. In Washington, D.C., Venable and Arnold & Porter will soon set up camp in the emerging Mount Vernon Triangle area.
Office development is increasing—but rents remain high
Given the dearth of available options at the top of the market, office developers are accelerating the pace of groundbreakings over the next 12 months. Speculative office development is increasing at a faster rate than preleasing, which bodes well for law firms seeking space in the not-too-distant future. Still, it will likely take another 36 months for the market to feel some relief. Currently, 38.3 million square feet of CBD Class A space is in development, the highest figure in seven years, and likely to grow higher.
Old can be new again
Costs remain high for new construction, with rents averaging $54.68 per square foot for CBD Class A space under construction—and those go much higher in the nation’s more expensive markets like New York or Palo Alto. Competition for trophy space in traditional CBDs, as well as the need for more efficient build-outs and floor plates, is pushing more law firms to seek fringe locations or to modernize existing facilities with high-tech features for meetings and collaborative work environments. Although firms are reducing their square footage overall, major law firms are upgrading their spaces with high-tech boardrooms, big event halls and collaboration space.
Law firms are always sensitive to the perceptions that high price tag properties can create with clients. So, instead of impressing clients with top-notch views of the city, they are hoping clients will appreciate versatile, collaborative spaces in submarkets that provide greater efficiency at lower overall cost.