With global economic growth on the rise and new real estate development popping up across U.S. cities, many law firms are likely to see more favorable tenant conditions in the next 12 to 18 months, a new report said. But even amid those relative bargains, many firms are likely to take the new spaces with the highest price tags.
JLL’s 2017 Law Firm Perspective report, released Thursday, said law firms have been more proactive than other tenants when it comes to preleasing space in new developments. As those spaces begin to open up, rent will begin to fall in the older properties. And even those who are taking the premium space are likely to benefit from concessions.
“Law firms tend to want to go to the nicest, newest building in town,” said Elizabeth Cooper, co-leader of JLL’s law firm group. “Top of the building” rates are unlikely to go down, she said, but an opportunity exists for firms in the middle or lower segment of the real estate offerings.
The report noted that law firms have faced significant rent growth since 2010—by 37.5 percent in Class A, central business district space. But they will see a notable shift in the real estate environment through the end of 2017 and into next year. U.S. markets that are particularly ripe for change include Washington, D.C., Chicago, Denver, New York and Los Angeles, the report said.
Most U.S. markets are still in a landlord-favorable phase, with rent rising or nearing its peak. In just one, Houston, conditions for tenants are highly favorable. There, said John Sikaitis, JLL’s managing director of research, changes in the energy industry have caused abundant subleased space to come back on the market.
“Even though the economic forecast is positive over the next six months, sometime over the next 36 months, 30 months, we’re reaching the end of this cycle,” Sikaitis said.
Foreshadowing the conditions to come, concessions for tenants have grown, the report said, by 33.8 percent in the top legal markets. These include tenant improvement allowances and free rent for tenants moving into new space.
Still, firms are cutting back on their square footage and rent per attorney, Sikaitis said, giving back between 20 and 25 percent of their space when they move.
JLL said the competition among law firms for young talent is also playing a role in real estate decisions, as the professional services sector sees more promising workers gravitate to the tech industry. For the legal industry in particular, the report said, law schools have seen major declines in enrollment. That means firms are more likely to consider leasing in areas where younger talent wants to live, rather than in more mature real estate markets.
“Law firms tend to be a little bit behind the curve in terms of adapting to new markets, and in some of these events they’ve been ahead of the curve,” Sikaitis said.
Looking at the global market, cities are a little more spread out in terms of where tenants are facing favorable conditions already. Shanghai, Seoul, London and Calgary are already more favorable for law firm tenants. Beijing and Washington, D.C., are the next markets to see a switch from a landlord’s market to a tenant’s market.
Lizzy McLellan writes about the Pennsylvania legal community and the business of law at firms of all sizes. Contact her at firstname.lastname@example.org. On Twitter: @LizzyMcLellTLI.