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It’s a well-known fact that Washington, D.C., is one of the hottest real estate markets in the country. What may not be quite as obvious is the degree to which the city’s law firms are contributing to the heat. In years past, the federal government typically led the pack in terms of leasing activity. But in 2003 there was a dramatic shift. Law firms last year accounted for a whopping 32 percent of all new leasing activity in the District, while government agencies made up only 11 percent. And where is all of this activity occurring? The East End of the city may be experiencing a surge of development and attracting mixed-use projects, but when it comes to D.C. law firms, it’s still all about K Street. The central business district — that section of town bounded west by 22nd Street, east by 15th Street, north by Massachusetts Avenue, and south by Pennsylvania Avenue — remains by far the preferred submarket for the legal professional. Close to 80 percent of the new office space that was leased by law firms in 2003 is located here. The East End of the city did attract some notable firms, such as Alston & Bird, which will be the anchor tenant of the Atlantic Building, currently under construction at 950 F St., N.W. Likewise, the new Boston Properties building being constructed at 901 New York Ave., N.W., will house firms including Finnegan, Henderson, Farabow, Garrett & Dunner; Powell, Goldstein, Frazer & Murphy; and Shea & Gardner. The stability of the law sector is a significant factor in fueling Washington’s extraordinary real estate investment market as well. A staggering 51 commercial grade downtown office buildings changed hands in the District in 2003, selling for a combined total value in excess of $3.1 billion. Even more remarkable is the rate at which selling prices have increased. The average price for downtown office buildings across all asset classes jumped 21 percent between 2001 and 2003, reaching a record high of $314 per square foot. Among the buildings that changed hands in 2003 was 1333 New Hampshire Ave., N.W. The lead tenant there is Akin Gump Strauss Hauer & Feld, a 275-attorney law office that occupies 273,000 square feet in the building. Akin Gump had seriously contemplated moving out of 1333 New Hampshire. But after a major building refurbishment in 2001, the firm agreed to stay put and to extend its lease well into the future. The firm’s commitment to the property was one impetus behind Boston Properties’ purchase of the building from SEB Immobilien for more than $347 per square foot. Industry veterans predict that Washington will continue to rank as one of the top-performing leasing markets in the nation, with single-digit vacancy rates and ascending rents. A quick comparison of rates in central business districts around the country shows San Francisco coming in at $27 per square foot, Atlanta at $19, and Dallas at $17. Vacancy rates in these central business districts stand at 20 percent, 21 percent, and 30 percent, respectively. Compare these numbers with the District’s. Locally, rent for all classes of buildings downtown averages $35 per square foot, virtually unchanged from the peak of the New Economy boom in 2001. In fact, Washington is the only major market with prices that rival those of New York Midtown, where space averages $45 per square foot. And at 8 percent vacancy, availability here is tighter than in New York, with its 11 percent vacancy rate. In 2003, a remarkable 1.3 million square feet was leased to D.C. law firms in blocks of 50,000 square feet or more. Wilmer, Cutler & Pickering had a big impact on that statistic. The firm completed the largest private sector lease transaction in the last decade, taking on 475,938 square feet on Pennsylvania Avenue. The firm amassed this space in three adjacent buildings along the avenue — a transaction that required the vision, cooperation, and commitment of numerous brokers and three different landlords. Extensive renovation will occur prior to the firm’s occupying the space. Law firms demand a high quality office product, and with a limited supply of large blocks of Class A space, managing partners are being forced to allow themselves a longer lead time when considering a move. A gestation period of three to four years is not uncommon for a large user. If no suitable existing space is available, firms often vie with each other for space in new construction. Take, for example, Finnegan, Henderson, the lead tenant for 250,000 square feet at 901 New York Ave. and O’Melveny & Myers, which recently moved into 135,000 square feet at 1625 I St., N.W. In their search for space, these firms competed with each other for the limited member of properties in the city that could accommodate their size. Taking on new space comes at a price. With the availability of quality building sites diminishing, rental rates have escalated dramatically, particularly for new construction delivering in the 2005 to 2007 time frame. Buildings that will be completed in 2006 and beyond are commanding rents in the low $60s per square foot, versus an average rate of $47 at year’s end for existing Class A space downtown. As law firms continue to expand, their total space under lease nationally can easily total hundreds of thousands of square feet, with accompanying rental obligations in the tens of millions of dollars. These rental payments are a significant bottom line expense to the firm partners. As a result, law firms have been dealing with rising construction costs by carefully allocating where their construction money is spent. Firms are focusing on putting high-end finishes in the client spaces, such as conference centers and the public areas of their offices. This benefits firms by providing better amenities to support their clients, and reduces the cost of finishing nonclient space. Nowadays, you are also much more likely to see an open floor plan with workstations, rather than individual offices. Firms are choosing to forgo luxuries such as dining facilities as well, saving space and staffing costs. Fortunately, the abundance of restaurants and fast-food outlets in Washington’s core makes it easy to come up with a meal. One controversial measure to control occupancy costs involves office sizes. Law firms throughout the country are adopting the development of uniform office size standards on a consistent, firm-wide basis. Commonly, partners are allocated offices in the 225 to 250 square foot range, with associate offices measuring 130 to 150 square feet. Even more controversial is applying a universal standard or “one size fits all” office size, 200 square feet per attorney regardless of partner status. That said, law firms still spend considerably more capital in building out their offices than most corporations. Construction budgets approaching $120 to $130 per square foot for law firm tenant space are not unusual, and represent a significant capital investment by these firms. Higher-end finishes, sophisticated networking and audio-visual equipment, soundproofed offices, and a host of other amenities contribute to the price tag. The bottom line is that major firms are simply unwilling to sacrifice quality. As a result, it is essential for today’s real estate professionals to help identify innovative means to control and effectively manage real estate costs for their clients. Mark Minich, a senior director with Cushman & Wakefield, has more than 20 years’ experience representing law firms both in Washington and nationwide. Cushman & Wakefield, a global real estate services provider with 163 offices in 49 countries, was founded in New York City in 1917 and is celebrating its 25th anniversary in the Washington metropolitan area this year.

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