We are pleased to release our 11th annual Law Firm Perspective. In this report, we examine the global economic and real estate environment for law firms as well as look at the opportunities and challenges found in nearly 50 office markets in the U.S., U.K. and Canada. For further insight on real estate conditions in other markets not featured in this report, please contact us and we will be happy to guide you around these cities.
We trust this intelligence positions your firm to effectively maximize your real estate investment, engage your people and grow your business in the year ahead.
Continued economic growth will create business expansion opportunities but also talent challenges for firms
- Demand for quality office space remains vibrant as economic forecasts for global growth will surpass 3 percent in 2018, the highest rate since 2011.
- Talent shortages across white-collar sectors are creating increased competition for skilled associate-level candidates. Law firms are also dealing with a drop-off in new entrants to the industry: since 2010, law-school enrollment has declined by 24.8 percent.
- Greater workplace utilization rates have recently slowed CBD Class A net absorption by 29 percent to a four-quarter moving average of 3.0 m.s.f.
New supply will provide opportunities both at the top of the market and for lower-cost second-generation space left behind by firms that migrate to new development
- Vacancy for CBD Class A space has registered an uptick for four consecutive quarters to 12.5 percent. In Washington, DC, vacancy is up 290 basis points over the year to 15.9, while in Chicago’s West Loop, vacancy has jumped 200 basis points to 12.6 percent, and in San Francisco, it increased 50 basis points to 8.9 percent.
- Firms will give back a large number of second-generation blocks upon relocation to new space, providing relief for more cost-conscious firms. This trend will widen the 370-basis-point gap in vacancy between Trophy and commodity Class A buildings.
- Across the urban core of the U.S., more than 65 m.s.f. of construction is under way, 53.9 percent of which is available for lease. In New York and Chicago, more than 6.3 and 4.2 m.s.f., respectively, of available space will come to the market.
New supply will slow rent growth and trigger continued increases in concessions, creating more favorable conditions for firms
- Rising rents are being countered by growing concessions. Over the past two years, concessions for tenants in CBD assets are up 15.3 percent nationally and 33.8 percent in top legal markets.
- Tenant improvement (TI) allowances for new construction have jumped to more than $125 p.s.f. in Washington, DC and are moving beyond the $100 p.s.f. mark in Chicago. In the top six legal markets, TIs average $85.83 p.s.f., 37.9 percent higher than the national average.
- Landlords in nearly one-third of markets across the U.S. are now providing 12 or more free months for tenants moving to new developments on a typical 10-year lease term, with firms in the top six legal services hubs seeing an average of 9.3 months compared to 7.1 months for the U.S. overall.
Global economic outlook remains optimistic
The outlook for the global economy for 2018 remains optimistic, with projections on its trajectory continuing to improve. For the first time since before the financial crisis, there appears to be a synchronized global upturn in regional economies around the world. Variation in performance exists across countries and regions, and key risks to the global economic expansion remain. However, we anticipate global economic growth for 2017 will accelerate past 2016's growth to hit just shy of 3 percent. The global economy is poised to reach growth of 3 percent in 2018 for the first time since 2011 when the global economy was still rebounding from the recession.
Global growth not spurring inflation
Although the global economic expansion is now in its eighth consecutive calendar year, growth is not waning. Economic growth over the next few years should remain relatively stable, even as inflation has plateaued—a favorable environment for continued economic growth and continued job gains. In what has been a hallmark of the current economic expansion, revenues for companies have grown faster than costs, increasing profitability. For the U.S. law firm sector, that same trend is true, but the trend is highly segmented based on firm size. Revenue for AmLaw firms was up 4.3 percent in 2016, but the 10 fastest-growing AmLaw 100 firms posted revenue gains of 18 percent in 2016, a sign of robust business growth, but also increased consolidation in the sector as a result of mergers and acquisitions, particularly for large firms scaling their expertise and footprint.
Corporate profits have risen despite weak labor productivity growth. As a result of this combination, it has been advantageous, and to an extent necessary, for companies to hire workers in order to keep pace with their expanding businesses. Weak inflationary pressure married with weak productivity growth has become a global phenomenon, so firms around the world have all responded similarly—by increasing their labor rolls.
Services-sector talent competition is fierce
This need for talent has proven particularly true for services-sector companies now in the vanguard of the global economy, particularly among developed nations that have moved beyond agriculture and manufacturing driving their economies. While the global economy continues to expand, the outlook for services-sector employment growth remains optimistic. Although employment growth is projected to slow a bit over the next couple of years, this is due to labor scarcity, not a lack of willingness to hire on the part of employers. Companies continue to struggle filling open positions, particularly highly educated workers who utilize office space, limiting the upside for office market fundamentals, ultimately a positive for law firms as it relates to real estate competition and cost, but a negative in terms of talent retention and recruitment. Traditional professional- and business-sector segments such as law, finance and consulting firms face a growing talent threat from tech companies globally. Many undergraduate and graduate students prefer to work for tech firms. In the U.S. alone, tech employment is up 52.4 percent since 2010, while law schools have reported a 24.8-percent decline since 2010.
Brexit risk for UK services employment
Overall unemployment in both the U.S. and the U.K. remain at cyclical lows of 4.4 and 4.3 percent, respectively, with peer markets throughout the Americas, Europe and Asia largely below 6.5 percent. The one key area for global concern is in the U.K., where growth could slow measurably depending upon how Brexit unfolds and the ultimate result of negotiations between the British government and the European Union (EU).
Key metropolitan areas will be the winners in a globalized economy
Given this outlook, major metropolitan areas, and particularly cities where the majority of law firms reside, will continue to benefit and outperform rural and exurban areas. Increasingly, the high-value-add service jobs and companies will cluster in a relatively small number of key metropolitan areas due to enormous economies of scale benefits, including sharing a labor force, information, suppliers and service providers. This is particularly true of globally oriented metropolitan areas that effectively export their services well beyond the metropolitan area. Changes in the labor market going forward will exacerbate this phenomenon.
Office-using employment growth slowing, but positive
Advanced nations are aging rapidly as the Baby Boomers around the world increasingly reach retirement age. Because Generation X is far smaller than the Baby Boomer generation, their numbers will be insufficient to fill vacant positions due to retirements. Therefore, Millennials will need to assume many of those positions. Cities drawing younger workers will be the clear winners over time because they will attract employers as well. London, New York, Chicago, Washington, DC, Los Angeles, Hong Kong and San Francisco have emerged as premier locations for globally minded firms to attract and retain the talent they need to remain competitive in a globalized, 21st-century economy.
Global office market conditions remain competitive for law firms, but conditions will become more favorable
Growing momentum in the global economy has ushered in a new phase of the office market expansion globally. Broadly across cities, rent growth has accelerated as expansionary economic activity has boosted tenant demand, chipping away at vacancy and pushing up occupancy, fueling an increased development pipeline. Notably, Western European markets have witnessed some of the greatest shifts in recent dynamics, seeing an uptick in competition among tenants across industries because of broad-based economic growth in the Eurozone. As a result, vacancy has fallen markedly in recent quarters, leading to sharply rising occupancy costs and a lag between tight market conditions and new supply to provide additional options for expanding tenants.
Global law firm office clock
Much of Asia and Australia, on the other hand, have seen more sustained performance, but will likely reach an inflection point as new supply begins to deliver incrementally, creating additional high-quality options for many firms seeking space in these regions. Tightening fundamentals have also kept sales markets buoyant, resulting in increased pro-forma expectations for owners that will drive further rent growth, a challenge many law firms should follow as sales activity, depending on the market, can reset building rents from 5 percent to upward of 20 percent, depending on the sale and underwriting.
Outlook varies by cities and very dependent on scale of development cycle
On a market-by-market basis, Sydney, Stockholm and Toronto are registering the fastest rent growth globally and thus present challenges for law firms to be in a position of negotiating leverage. With a combination of supply constraints and limited recent deliveries fueling intense competition among legal and professional services and tech tenants, rent growth in these geographies is exceeding 10 percent annually. Despite a pause in 2016 as a result of the EU referendum, London has held steady so far in 2017: prime rents in both the City and the West End have shown no change. A slew of development activity in the City set to hit the market over the next two to three years will significantly improve the quantity and quality of options for firms, particularly those outside of Midtown.
U.S. office market’s trends are beginning to show signs of change
Domestically, the U.S. office market’s trends of tight vacancy, net expansion from occupiers and increasing costs are beginning to show signs of change. Vacancy at the top of the U.S. office market is slowly moving upward and now sits at 12.5 percent, although still below historic norms, driven by rising volumes of new development hitting the market. Further helping tenants has been the slowdown in occupancy growth due to labor and space shortages. Secondary markets including Austin, Charlotte, Nashville, Oakland and Raleigh have bucked this trend through sustained absorption, boosting rent growth and limiting the ability of firms to expand or relocate to higher-quality space. Firms in these markets will face more severe constraints over the short term.
The biggest challenge for law firms on the real estate side is rent growth, which continues unabated.
In response to a 35.7 percent spike in CBD Class A rents since 2010, legal services hubs are expecting a sharp uptick in speculative deliveries and are responsible for the majority of the 65 million square feet of premium product under construction in urban cores, with firms taking on space in high-profile developments such as Hudson Yards and Manhattan West in New York, 444 W Lake Street and 150 N Riverside Plaza in Chicago, 1900 N Street NW in Washington, DC and 100 Northern Avenue in Boston. Firms in these geographies will have not only plenty of new, efficient space but also a plethora of second-generation space to choose from. More second-generation space is coming back to the market as law firms have been some of the most proactive tenants in preleasing space at new developments, along with tech, financial and professional services firms.
Through year-end 2017 and into 2018, the real estate environment both domestically and globally for law firms will shift markedly. Tenants will see an increase in space options not present even one year ago and with that will come greater competition between landlords of both new and existing buildings, leading to increasingly higher concession packages eventually flattening and falling rents.
About JLL Law Firm Group
The JLL Law Firm Group provides strategic and innovative real estate solutions tailored to meet the unique operational and financial objectives of law firms. Our multi-disciplinary senior-level team has deep experience working both in and with law firms, and has a proven track record of consensus-building. Our global expertise coupled with local market knowledge enable us to work with firms of all sizes and ensure you are proactively dealing with the ever-changing real estate and economic markets.
For more information, contact:
Tom Doughty | +1 202 719 5652 | thomas.doughty@am.jll.com
Elizabeth Cooper | +1 202 719 6195 | elizabeth.cooper@am.jll.com
Philip Leibow | +1 202 719 5765 | philip.leibow@am.jll.com
Greg McCavera | +1 202 719 5779 | gregory.mccavera@am.jll.com
Matthew Coursen | +1 202 719 6197 | matthew.coursen@am.jll.com
Bella Schiro | +1 202 719 5834 | bella.schiro@am.jll.com
Bobby Blair | +1 202 719 5584 | bobby.blair@am.jll.com
© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.