Like many U.S. cities, Philadelphia and Pittsburgh have seen a boost in real estate development that will create more favorable tenant conditions in the next 12 to 18 months, according to a new report. While some law firms are likely to move into the most premium spaces, firms outside the top tier will benefit as increased competition slows rent growth.
JLL’s 2017 Law Firm Perspective report, released Thursday, said both Philadelphia and Pittsburgh are in a landlord-friendly phase, but that will shift to neutral in 2018 and tenant-favorable in 2019.
In Philadelphia, JLL said, 2018 will bring a wave of lease expirations, driving up demand in the market. That will be counterbalanced by new construction expected to become available in 2018, however, slowing rent growth. Midsize law firms will have the greatest number of options to choose from as tenants in various industries downsize their space, the report said.
In Pittsburgh, the report said, law firms have clearly been “rightsizing” their office space, as shown by 250,000 square feet of future availability in the most high-dollar properties. Rents will likely continue to increase thanks in part to tenant demand from the professional services, JLL said.
The report said law firms across the globe have been more proactive than other tenants when it comes to pre-leasing 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.
More Perks To Come
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 in a landlord-favorable state, with rent rising or nearing its peak. In just one, Houston, conditions for tenants are highly favorable. There, John Sikaitis said, 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,” said Sikaitis, JLL’s managing director of research.
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 law firms competing for young talent is also playing a role in real estate decisions, as professional services see potential lawyers gravitating 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 setting up shop in markets where younger talent want 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. In Shanghai, Seoul, London and Calgary, the markets are already more favorable for law firm tenants. Beijing and Washington, D.C., is the next market to see a switch from a landlord’s market to a tenant’s market.
Lizzy McLellan can be contacted at 215-557-2493 or email@example.com. Follow her on Twitter @LizzyMcLellTLI.