Law Firm Perspective Global 2013 Diverging global markets present opportunities and challenges for law firms in 2014 Positive economic news has increased in recent months across many of the developed economies including the U.S., U.K., part of the Eurozone and Japan, fuelling increased optimism for 2014 and 2015. However, emerging market growth has decelerated, notably in China and Latin America, providing firms with stability in their core business, but greater uncertainty in high-growth areas. With global growth prospects volatile and continuing to diverge, law firms will encounter diverging market conditions across the globe over the next 12 months. That split in leverage, though, will begin to coalesce in the latter part of 2014 and early 2015 when law firms are projected to encounter tighter real estate markets, resulting in heightened landlord confidence and decreased leverage in lease negotiations.
... Nearly 70.0 percent of law firm cities we report on project rents to grow in 2014 and even more slide into that majority as 2015 approaches. However, 2014 market conditions appear more favourable when looking at the law firm hubs of New York, Washington, Los Angeles, Paris, Sydney, Hong Kong, London and Chicago with just the latter three projected to shift into landlordfriendly territory next year.
Jones Lang LaSalle Law Firm Perspective Global 2013 3 Jones Lang LaSalle Law Firm Group In the slowly-recovering economic environment we encounter, decision makers tasked with management responsibility for global, national or regional law firms increasingly find themselves in the real estate business as a matter of sound firm management. The amount of time required to deal with portfolios in multiple offices in different cities and / or countries has increased and has become ever more complex with critical events arising on a regular basis. These events are nearly always contextual; accordingly, they require a deep understanding of local market conditions for proper evaluation and action. With over 1,000 offices in 70 countries worldwide, the Jones Lang LaSalle Law Firm Group has the scope and platform to proactively anticipate those issues and events and advise you on how to navigate the path forward regardless of the market environment or local geography your firm is embedded in. The Jones Lang LaSalle Law Firm Group concentrates on developing occupancy strategies, executing transactions and providing related occupancy services to our law firm clients, locally, nationally and globally. The team deeply values the importance of providing timely, accurate and relevant market information and research to our law firm clients that enable them to efficiently manage their real estate in such a way as to generate maximum productivity, while mitigating cost. Accordingly, we are proud to present the seventh annual issue of our global market perspective. This annual perspective provides information on 30+ major markets across the United States, Canada, Europe, the Middle East, Asia and Australia. The report details market and real estate trends for law firms around the globe, with the goal of assisting you and your firm in navigating the increasinglychanging global marketplace. We trust you will find this information useful and solicit your feedback if there are areas you would like to see expanded in the future.
4 Law Firm Perspective Global 2013 Jones Lang LaSalle In this report Jones Lang LaSalle Law Firm Group 3 In this report 4 Law Firm Global Perspective 5 Global law firm trends 7 Law firm market map 8 Global office property clock 9 Americas 10 Atlanta 11 Boston 12 Chicago 13 Dallas 14 Houston 15 EMEA 34 Amsterdam 35 Brussels 36 Dubai & Abu Dhabi 37 Germany 38 London City 40 Madrid 41 Milan 42 Moscow 43 Paris 44 Warsaw 45 Contacts 46 Los Angeles 16 Miami 17 New York 18 Philadelphia 19 San Francisco 20 Washington, DC 21 Calgary 22 Montréal 23 Toronto 24 Vancouver 25 Asia Pacific 26 Beijing 27 Hong Kong 28 Melbourne 29 Shanghai 30 Singapore 31 Sydney 32 Tokyo 33
Jones Lang LaSalle Law Firm Perspective Global 2013 5 Law Firm Global Perspective 2013 has been another year of change in the broader economic operating environment in which international law firms operate. In recent months, positive economic news has increased across major law firm markets including the U.S., U.K. and even the Eurozone, fuelling increased optimism for 2014 and 2015 growth prospects in these markets. However, as the U.S., U.K. and Japan witness more positive economic developments, expectations for growth in emerging markets have been downgraded this year, most notably in China and Latin America. With global growth prospects volatile and continuing to diverge, law firms will continue to be challenged to adapt both business and real estate strategies to meet the requirements of such a rapidly changing global environment. Law firms continue to face a low growth environment While more positive economic signs have emerged in some law firm markets, the outlook for most law firms has remained more muted driven by fairly flat conditions across most practice areas, which, when combined with fee compression, creates a slow-growth environment. Although some markets (such as London and key German markets in EMEA, Northern California, Texas and Calgary in North America and South Korea in Asia) have seen international law firms growing and headcounts increasing, many law firms continue to rightsize their operations. For U.S. firms the revenue levels of the AmLaw 100 grew by just 2.8 percent in 2012 after growth rates of 4.7 percent and 5.9 percent in 2010 and 2011, respectively. The recent revenue gains appear even more moderate when comparing them to the 11.0 percent annual growth in revenues from 2001 to 2007 for AmLaw 100 firms. As revenue growth slowed, so did profits per partner with just 66 of the AmLaw 100 firms demonstrating increased profitability. Globallyfocused firms with diverse practice groups have fared best and have been able to reinvest into the business, attracting specialty practice groups and boutique shops that further enhance the firm s offerings and geographic scope. As challenges for law firms persist across the business environment, they have also arisen in many real estate markets of importance for law firms. After nearly seven years of enhanced leverage for tenants in the U.S., firms encounter a more challenging market ahead in 2014 and 2015. A flight to quality has diminished the amount of Trophy and Class A options, spaces that most international and domestic law firms usually flock to. In that segment of the market, blocks of spaces, of all sizes, have shrunk from 12 months ago. This decrease in available space has pushed rents up across the board nationally by nearly 3.0 percent year-over-year in the U.S. Fortunately for firms, the greatest opportunity for extended leverage over the next 12 to 18 months sits in markets where firms have the largest presence: New York, Washington, Chicago and Los Angeles. For different reasons, these markets have been more challenged economically and remain behind rather than ahead of the overall U.S. recovery. Across the major Canadian markets, law firms will experience more favourable conditions than they likely will in the U.S. over the next several years. The development cycle across key markets such as Toronto, Calgary and Vancouver is fairly robust, providing firms options in those new developments, but also in the secondgeneration options left behind by other firms. As a result of supply dynamics moving with law firms over the next 24 to 36 months, we expect rents to peak as well. In Europe, real estate market conditions are diverging. The supply of available prime office stock in the City of London is diminishing and law firms face the potential for rental increases and diminishing incentives due to a number of large lettings and diminishing supply in Grade A buildings. In Germany, too, law firms may face more landlord-favourable conditions over the next 24 months in select locations including Munich and Frankfurt. Other European markets however offer greater opportunities for law firms to take advantage of more tenant-favourable conditions and improve the quality of their real estate or reduce costs. In Milan, Paris, Brussels, Madrid and Warsaw, real estate market conditions will be in favour of law firms in 2014. In Asia Pacific, office leasing activity has reduced in many markets mirroring greater uncertainty in economic growth trajectories. In the regional hubs of Singapore and Hong Kong, rental conditions have been softer in 2013 with rent declines seen in Hong Kong in the first half of 2013. Market conditions will turn more toward landlords in both markets as we move into 2014. For law firms focused on Beijing and Tokyo, rents are likely to rise in both going into 2014, whereas Sydney, Melbourne and Shanghai will offer more favourable real estate market conditions ahead. Global clients drive law firm expansion into emerging markets Despite some tapering of growth prospects in large emerging markets such as China, India and Brazil, international law firms are continuing to look to emerging markets for future growth potential. Driven largely by the global expansion of their clients, emerging markets including Africa have been on the agenda for a growing number of firms. In Africa, corporate growth is being driven by financial services, consumer goods, telecoms, infrastructure, energy and natural resource industries and is creating growing business opportunities for law firms. Routes to entry in Africa vary with firms such as Clifford Chance, Norton Rose and Allen & Overy opening offices in the past two years, while others including Linklaters and Eversheds have formed partnerships with local players. Acquisition is another favoured route and the June tie-up between Norton Rose and Fulbright & Jaworski will provide Norton Rose with deeper coverage in Africa through existing Fulbright & Jaworski offices. Entry into new and emerging markets creates a range of challenges for law firms looking to open offices. Access to reliable property data
6 Law Firm Perspective Global 2013 Jones Lang LaSalle is key in an opaque market and working with partners who have a deep understanding of the market is also important. Strategic updates from law firms indicate this growth is set to continue with Clifford Chance announcing plans to consider its options in other key regional hubs including Egypt, Nigeria and South Africa and Norton Rose recently outlining intentions to extend its network to African jurisdictions such as Angola, Egypt, Kenya, Mozambique and Nigeria amid the firm s fast global expansion. Another opportunity for law firms revolves around space utilization. Law firms are facing the continuing challenge of balancing increasing client expectations and client desire to drive down costs. As a result, many law firms remain focused on managing the cost of their real estate portfolio more effectively and maximising operating efficiency. Firms that embrace modern layouts and enhanced efficiency measures have the opportunity to shrink real estate occupancy by more than 15.0 percent, providing an opportunity to cap cost structures in a still-challenging business climate. In today s real estate market, evolving demographics are encouraging greater collaboration among colleagues and new patterns for how and where we work. This shift has not just affected law firms, but banks, consulting firms, technology companies and really any office tenant across the globe. The focus on workplace optimisation will remain a key priority for law firms as they implement global real estate strategies into 2014 and beyond. As has been the case in the past, U.S. firms will continue to lag their London counterparts in moving to even more aggressive utilization tactics, but they are gradually over time adapting some of these proactive measures.
Jones Lang LaSalle Law Firm Perspective Global 2013 7 Global law firm trends $...meaning leverage is moving away from law firms. 67% of global markets polled expect rents to increase in 2014... At the same time, concessions provided to law firms paint more of a blurred picture: concessions stable 44% concessions decreasing concessions increasing 33% 23% Of global markets polled, overall, law firm demand is stable 60% stable 23% increase 14% decrease Tenant-favourable markets waning... 66% 45% 2013 tenant-favourable of law firms polled are focused on using space more efficiently 2014 26% 2015 8%
8 Law Firm Perspective Global 2013 Jones Lang LaSalle Law firm market map Vancouver Calgary Toronto Montreal Chicago Boston San Francisco Philadelphia New York Los Angeles Dallas Washington DC Atlanta Houston Miami Amsterdam Germany London City Paris Brussels Warsaw Milan Madrid Mosow Dubai & Abu Dhabi Beijing Shanghai Hong Kong Tokyo Singapore Sydney Melbourne
Jones Lang LaSalle Law Firm Perspective Global 2013 9 Global office property clock Amsterdam Vancouver Cologne, Stuttgart, Toronto Montréal, Paris Calgary Berlin, Hamburg, Moscow Munich Houston, San Francisco Rental growth slowing Rents falling Milan Dallas, Düsseldorf Frankfurt London Rental growth accelerating Rents bottoming out Beijing, Melbourne Warsaw Boston Tokyo Dubai, New York Abu Dubai Sydney Los Angeles, Miami Atlanta, Philadelphia, Shanghai Brussels, Chicago, Hong Kong, Singapore Washington, DC Madrid Americas Asia Pacific EMEA The clock diagram illustrates where Jones Lang LaSalle estimates each prime office market is within its individual rental cycle as of October 2013. Markets move around the clock at different speeds and directions. The diagram is a convenient method of comparing the relative position of markets in their rental cycle. Their position is not necessarily representative of investment or development market prospects. Their position refers to prime face rental values. Markets with a step pattern of rental growth do not tend to follow conventional cycles and are likely to move between the hours of 9 and 12 o clock only, with 9 o clock representing a jump in rental levels following a period of stability.
10 Law Firm Perspective Global 2013 Jones Lang LaSalle Americas Need?
Jones Lang LaSalle Law Firm Perspective Global 2013 11 Atlanta Locational preference: Atlanta s largest and most venerable law firms are located in the Central Business District along the Peachtree corridor in A-plus tower space. The Midtown submarket houses the largest concentration of legal tenants, although some firms remain Downtown for convenient access to the city s courthouses and government agencies. To the north, Buckhead s financial district has also attracted some of Atlanta s most visible firms; however, few big blocks of contiguous premium space remain in Buckhead that can accommodate significant requirements, whereas Midtown still has plenty of options. 11.2% Percent of Class A market occupied by law firms 2.0% Percent of law firms comprising active tenants in the market 21 greater than 50,000 s.f. 5 Number of AmLaw 100 firms with offices locally Law firm activity has been relatively quiet for the last 24 months after several years on the immediate heels of the recession, in which some of the city s biggest firms committed to relocating or renewing existing space. Currently, there are no big firms in the market on par with what was seen in 2010 and 2011. Activity in the traditional law firm submarkets has been muted, if only because most of the biggest firms have already made their real estate plays. Two years ago, large firms were giving back significant amounts of space, a trend which has since stabilized since most of the activity has stemmed from mid-sized and small firms. For those who are in the market for space, conditions are starting to tighten. Firms seeking premium high-floor Trophy space in Buckhead will find their options extremely limited due to lack of big block space. Midtown offers more flexibility and, additionally, has proven to be the go-to submarket for the greatest concentration of law firms over the last 15 years. 2013 LAW FIRM COMPLETED TRANSACTIONS Bryan Cave 1201 West Peachtree Street 152,383 s.f. Hunton & Williams 600 Peachtree Street 45,707 s.f. Johnson & Freedman 1587 Northeast Expressway 50,000 s.f. ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Fish & Richardson 25,000 Foltz Martin 20,000 PRICING AND INCENTIVE AVERAGES $29.80 3.6% Class A asking rent ($ p.s.f) TI allowance ($ p.s.f.)** Class A annual escalation 13.1% 3.6% 26.0% Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average $50.00/$25.00 12/3 **averages on 10-year new/renewal transactions Discount for sublease space* Free rent (months)** Challenges for law firms Particularly in Buckhead, there is limited availability of large contiguous blocks of premium space in the Trophy towers. Pricing has begun to tighten in both Buckhead and Midtown and landlords have tightened their fists on concessions. Opportunities for law firms Dissolutions and sublease dispositions have created additional space options for tenants. Competition in the marketplace is limited by a finite number of near-term lease expirations. 2013 2014 2015 2016 2017
12 Law Firm Perspective Global 2013 Jones Lang LaSalle Boston Locational preference: The city s premier law firms occupy space in the most prestigious office towers in Boston s Back Bay, Financial and Seaport Districts. 17.6% Percent of Class A market occupied by law firms 8.4% Percent of law firms comprising active tenants in the market 28 greater than 50,000 s.f. 33 Number of AmLaw 100 firms with offices locally Law practices in Boston have begun to turn the corner as evidenced by the positive employment growth over the past year. The city of Boston is experiencing growth in the intellectual property law practice, spurred by the area s rise in the high-tech and life sciences fields. As a result, the Seaport District, dubbed the Innovation District of Boston and home to a growing number of high-tech start-ups and pharmaceutical giant Vertex, has attracted law firms from within and outside Boston looking to maximize proximity to potential clients. The area also presents build-to-suit opportunities as restacking current spaces has proven costly and inefficient. For instance, Finnegan announced its move to the Seaport in 2012 following Vertex s move; Concord, MA-based Hamilton Brook will open a Seaport branch looking to compete in the IP space; and Goodwin Procter signed a build-to-suit lease to occupy 360,000 square feet at Fan Pier, downsizing from 415,000 square feet in Financial District. Due to the rightsizing trend, however, Boston law firms are not increasing their footprints in the same proportion to the numbers of their employees as they used to. Advanced mobile technology, cost cutting measures and open-space work environment are examples of factors leading to fewer square feet per employee across law firms. Some have eliminated the needs for support roles in high-cost spaces altogether, choosing to establish a centralized support offices elsewhere or outsource to third-party business services companies. 2013 LAW FIRM COMPLETED TRANSACTIONS Goodwin Procter 2 Harbor Shore Drive 360,000 s.f. Relocation Skadden 500 Boylston Street 48,000 s.f. Relocation Todd & Weld One Federal Street 25,000 s.f. Relocation ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Choate 250,000 Pierce Atwood 30,000 Sherin & Lodgen 30,000 PRICING AND INCENTIVE AVERAGES $50.67 $1.00 Class A asking rent ($ p.s.f) TI allowance ($ p.s.f.)** Class A annual escalation 20.0% 10.0% 30.0% Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average $50.00/$30.00 4/2 **averages on 10-year new/renewal transactions Discount for sublease space* Free rent (months)** Challenges for law firms Rising rents prompt large users to seek alternative spaces outside the established submarkets of the Back Bay and the Financial District. Average-sized users compete with high-tech firms for spaces within the 10,000 to 30,000-square-foot range. Concession packages are becoming less attractive as free rent and tenant improvement allowances are decreasing. Opportunities for law firms Options exist for build-to-suit opportunity and brand new spaces throughout the Seaport District and downtown. Low and mid-rise options present cost-reducing solutions to small, growing law firms. Lease expirations from major corporate firms provide options on large blocks over the next two years. 2013 2014 2015 2016 2017
Jones Lang LaSalle Law Firm Perspective Global 2013 13 Chicago Locational preference: Most of Chicago s largest law firm tenants are located in the West Loop and Central Loop submarkets and a few are in the River North. The Central Loop is also home to the largest share of the market s small and mediumsized firms. The East Loop is still a viable option for firms looking for space at competitive rates. There are an abundance of large blocks available with views of Grant Park or Lake Michigan. 17.6% Percent of Class A market occupied by law firms 13.8% Percent of law firms comprising active tenants in the market 54 greater than 50,000 s.f. 38 Number of AmLaw 100 firms with offices locally For the first time since 2009, a new office tower is under construction in downtown Chicago and two local law firms have already announced plans to relocate to the prime Class A tower. McDermott Will has signed a lease for 225,000 square feet at the new West Loop development, called River Point. With the market for high-end, high-rise Trophy space tightening, firms seeking such space are seeing fewer landlord concessions, while others in the market for standard Class A and B space still have leverage. Once River Point is delivered, though, the market for Trophy blocks is expected to loosen slightly, particularly if a second new building commences. As in many markets across the U.S., Chicago law firms are increasingly cautious and efficient with their space by shifting to single-sized offices, adding interior offices and reducing their footprint by restructuring their leases or subleasing a portion of their current space. Of the top 25 Chicago law firms, 15 have either downsized or sublet space in the past few years. A recent example of this is the 55,000-square-foot sublease of Locke Lord s space at 111 S Wacker Drive by Harris Associates. 2013 LAW FIRM COMPLETED TRANSACTIONS McDermott 444 W Lake Street 225,000 s.f. Relocation Dentons 233 S Wacker Drive 204,705 s.f. Relocation (in building) Lewis Brisbois 550 W Adams Street 54,782 s.f. w/ expansion ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Seyfarth Shaw 200,000 Holland & Knight 100,000 Freeborn & Peters 90,000 PRICING AND INCENTIVE AVERAGES $36.41 2.5% Class A asking rent ($ p.s.f) Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average Class A annual escalation 21.4% 5.0% 35.5% Discount for sublease space* Challenges for law firms The market for high-end, high-rise Trophy space is still tight so firms are facing more landlord favourable conditions. As the number of large-block spaces decline, firms in need of 100,000 square feet or more have fewer options. Opportunities for law firms Smaller and emerging firms have more opportunities for good deals. Cost-saving solutions that firms are making could allow for more future growth, which would drive greater real estate needs in the future. $57.00/$28.00 9/5 TI allowance ($ p.s.f.)** Free rent (months)** **averages on 10-year new/renewal transactions 2013 2014 2015 2016 2017
14 Law Firm Perspective Global 2013 Jones Lang LaSalle Dallas Locational preference: The majority of law firms (78.0 percent) are located within the downtown area (the Dallas CBD & Uptown), with the next largest concentrations in Central Expressway, LBJ and Far North Dallas. The larger law firms are concentrated in the AA and Trophy properties of the Dallas CBD and Uptown. Their movement will parallel any new, high-end development delivered in these submarkets. Both the CBD s and Uptown s latest spec developments are significantly occupied by law firms. 16.4% Percent of Class A market occupied by law firms 4.9% Percent of law firms comprising active tenants in the market 27 greater than 50,000 s.f. 20 Number of AmLaw 100 firms with offices locally Tight market conditions are beginning to drive the latest office construction cycle in Dallas Downtown. While law firms alone do not typically kick-off new construction, they are significant tenants in AA and Trophy assets in the CBD and Uptown areas. Timing looks optimum for new construction because a great deal of churn is taking shape as leases expire at a number of major law firms over the next four years. This pattern occurred in the last cycle when Thompson & Knight (One Arts Plaza), Koons Fuller (Park Seventeen) and Patton Boggs (2000 McKinney) all took substantial blocks in the newest offerings. Halls Arts District project will be the next office building to break ground. Although KPMG is the lead tenant, Jackson Walker has a deal in the works for up to a 100,000-square-foot block. Effective rents on these new projects are significantly higher (typically about 30.0 percent) than average existing Class A rates. To balance these costs, law firms are optimizing their space. Some large firms with leases expiring near-term are reducing their requirements by 40.0 percent. A few regional-scale firms, however, have bucked the higher rents, opting for more economical, existing downtown Class A space. 2013 LAW FIRM COMPLETED TRANSACTIONS Hartline Dacus 6688 N Central Expressway 36,603 s.f. Jim Adler & Associates 2711 N Haskell Avenue 28,162 s.f. Relocation In addition to the above mid-sized deals that closed in 2013, several high-profile law firm leases were completed in the latter part of 2012 including leases by Jones Day and Akin Gump for 133,187 s.f. and 104,277 s.f., respectively, as well as mid-sized leases finalized by Munsch Hardt (78,524 s.f.) Baron Budd (47,077 s.f.). ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Locke Lord 160,000 Gardere 110,000 Jackson Walker 80,000 PRICING AND INCENTIVE AVERAGES $24.31 2.5% Class A asking rent ($ p.s.f) 30.0% 12.0% 40.0% Premium for Trophy space* *rent difference from Class A average $45.00/$10.00 12/6 TI allowance ($ p.s.f.)** Discount for negotiated rent* **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms The market has shifted from strongly tenant-favourable to neutral of late; effective rates are rising, especially in Uptown. Limited new construction over the next couple years will force law firms with near-term lease expirations to renew in place or consider secondgeneration space. Financing constraints for new development limits construction levels below historic norm. Opportunities for law firms Full floor tenants or smaller continue to have a plethora of options. One or two new construction projects may begin construction (could deliver in the next 24 to 30 months). Increase in institutional ownership in CBD makes existing properties more attractive to law firms. 2013 2014 2015 2016 2017
Jones Lang LaSalle Law Firm Perspective Global 2013 15 Houston Locational preference: Houston law firms are found mostly in the CBD submarket. They are concentrated in Class A buildings with some of the most expensive rental rates in the city. Because of the lack of vacancy downtown, if law firms were to move they would consider moving to Midtown, Greenway Plaza and Galleria submarkets into new and proposed buildings with high-end finishes. 16.0% Percent of Class A market occupied by law firms 2.2% Percent of law firms comprising active tenants in the market 27 greater than 50,000 s.f. 45 Number of AmLaw 100 firms with offices locally The Houston office market continues to grow, largely in part due to the impact of the strength of the energy sector on the local economy. For this reason, tenants, especially energy-related law firms, are drawn to Houston, making space options scarcer. In the CBD, the vacancy rate for Class A space is currently at 9.2 percent, supporting evidence for the reality that large blocks are tough to piece together. As a result of this, when looking at law firm activity, most firms have been forced to renew their leases rather than relocate to new space. Similarly, even in renewal negotiations, landlords currently have the upper hand in the market and are able to increase asking rates across the board. Expect this to be the case for the next several quarters until the market supply can meet the needs of high-end tenants. While options for Class A space downtown are very limited, there are a number of proposed buildings and new projects that could potentially draw some of the law firms away from the CBD. These include BLVD Place in The Galleria, Kirby Grove in Greenway Plaza and CityCentre Five in The Energy Corridor. 2013 LAW FIRM COMPLETED TRANSACTIONS BakerHostetler 811 Main Street 75,737 s.f. Relocation Linn Thurber 3555 Timmons Lane 30,637 s.f. Strasburger 909 Fannin 28,226 s.f. Expansion ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Gardere 100,000 Akin Gump 75,000 FosterQuan 21,572 PRICING AND INCENTIVE AVERAGES $39.20 $0.50 Class A asking rent ($ p.s.f) 5.0% 4.0% 20.0% Premium for Trophy space* *rent difference from Class A average $50.00/$35.00 4/2 TI allowance ($ p.s.f.)** Discount for negotiated rent* **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms CBD vacancy is currently very low, making it difficult to expand or relocate to large blocks in Class A buildings. With limited availability, rents will continue to increase, especially in A+ buildings. Firms must be willing to commit to longer leases than they may desire in order to gain a more competitive rent on space. Opportunities for law firms West Houston development remains strong, offering an alternative to the inner-loop locations and access to a growing number of energy firms in that area. With development of the Grand Parkway, future projects are being proposed farther outside of CBD, which could mean a cheaper cost for firms looking to move outward. 2013 2014 2015 2016 2017
16 Law Firm Perspective Global 2013 Jones Lang LaSalle Los Angeles Locational preference: Los Angeles law firms are concentrated in the Downtown CBD near the courthouses. Specialized practice groups catering to entertainment and media companies are located close to their clients on the Westside in the Century City submarket. Moving ahead, some law firm tenants will elect to be closer to tech and entertainment clients and thus will migrate to more non-traditional low rises in Santa Monica and Playa Vista. 21.9% Percent of Class A market occupied by law firms 21.0% Percent of law firms comprising active tenants in the market 41 greater than 50,000 s.f. 69 Number of AmLaw 100 firms with offices locally We continue to see Los Angeles law firms playing musical chairs with a market driven by cost-saving opportunities. Los Angeles remains a tenant-favourable market and owners have been offering generous rents and concessions to attract larger tenants. Blank and Rome relocated within Century City from Watt Plaza to the Century Park Towers. Additionally, CohnReznick consolidated their Westside operations, combining their Brentwood and Century City offices and moving into the Towers. We also witnessed a few new entrants to the Los Angeles market. Barnes and Thornburg signed a new lease at 2049 Century Park East. The firm has been adding headcount nationwide and chose to expand its presence in Southern California by opening an office in Century City at 2049 Century Park East. Philadelphia-based Pepper Hamilton also opened a new office in the Los Angeles CBD at 350 S Grand Avenue. The Century City and Downtown Los Angeles markets have high vacancy and a large number of available blocks of space. Changing ownership partners in both markets will infuse cash to fund improvements as well renewed competition for top-tier tenants in the market. 2013 LAW FIRM COMPLETED TRANSACTIONS Bowman and Brooke 970 West 190th Street 36,703 s.f. Relocation Blank Rome 2029 Century Park East 25,723 s.f. Relocation Barnes & Thornburg 2049 Century Park E 25,273 s.f. Relocation ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Sidley Austin 250,000 Nixon Peabody 75,000 White & Case 50,000 PRICING AND INCENTIVE AVERAGES $41.99 4.0% Class A asking rent ($ p.s.f) 4.4% 20.5% 37.3% Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average $55.00/$37.00 10/10 TI allowance ($ p.s.f.)** **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms CBD Class A ownership consolidation is leading to sizable market share likely to lead to high rents. Increasing residential rents in the CBD are making it more expensive for new associates to locate close to work. CBD and Century City parking remain some of the most expensive in the Los Angeles market. Opportunities for law firms Large near-term Westside lease expiration creating short-term leverage for law firms looking at early renewals. Concession packages have increased to all-time highs. Robust media and entertainment sector performance, coupled with new technology entrants from Silicon Valley, are creating opportunities for specialized practice groups. 2013 2014 2015 2016 2017
Jones Lang LaSalle Law Firm Perspective Global 2013 17 Miami Locational preference: Miami s CBD is comprised of two submarkets, Brickell and Downtown. The majority (57.3 percent of Class A law firm users) occupy space within the Downtown sector of the urban core. Law firm requirements presently comprise over 420,000 square feet throughout Miami. Of this, nearly 384,000 square feet or 90.0 percent are designated for the CBD. 21.0% Percent of Class A market occupied by law firms 19.5% Percent of law firms comprising active tenants in the market 6 greater than 50,000 s.f. 20 Number of AmLaw 100 firms with offices locally Over the last two years, mega deals (40,000 square feet plus) throughout Miami reveal a diversified office base with the majority of companies preferring suburban settings. Among the largest law firms, however, the urban core remains the location of choice as the CBD captured all of the leases within this size category. Florida s top five law firms each have a CBD Trophy address. Congregating among like users, all but one of this year s top law firm transactions were either CBD renewals or relocations from within the CBD. Size still matters and tenant-favourable conditions persist for the crème of the crop users who can choose premium space from new construction as well as second-generation options. Downsizing of office space needs does not necessarily mean downsizing of staff. Rightsizing or efficiencies due to space design and rapidly changing technology have allowed more space for more employees. Most core and new business law practice areas here are either stable or growing. National law firms establishing a Miami foothold are strengthening and underscored by new-to-market users and acquisitions/mergers/new law firm formations. What is different is the relatively high ratio and swelling presence of AmLaw 200 firms. A variety of demand factors is at play fueled by the significant and rewarding opportunity for capturing international business, especially from Latin America. 2013 LAW FIRM COMPLETED TRANSACTIONS Fowler White Burnett 1395 Brickell Avenue 30,000 s.f. with contraction Weil 1395 Brickell Avenue 24,000 s.f. Gunster 600 Brickell Avenue 21,000 s.f. Relocation ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Shutts & Bowen 80,000 White & Case 60,000 GrayRobinson 35,000 PRICING AND INCENTIVE AVERAGES $40.46 3.0% Class A asking rent ($ p.s.f) Class A annual escalation Challenges for law firms Contiguous Trophy space with prime views is limited. Concessions continue to whittle down for both new and renewal activity. 10.0% 4.5% 25.0% Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average $55.00/$55.00 7/7 TI allowance ($ p.s.f.)** **averages on 10-year new/renewal transactions Discount for sublease space* Free rent (months)** Opportunities for law firms While pricing is shifting, overall levels remain favourable and are on par with rents nearly seven years ago. Tenant improvement allowance offers, particularly for the newest buildings, remain high, compared to historic norms. New assets/upgrades from existing product offer greater efficiencies, upgraded finishes and increased amenities. 2013 2014 2015 2016 2017
18 Law Firm Perspective Global 2013 Jones Lang LaSalle New York Locational preference: Firms gravitate to newer Trophy/A buildings within the Columbus Circle, Grand Central, Plaza District and Times Square in Midtown and the Financial District Downtown. Though large blocks of Class A space are becoming available Downtown at a significant discount to comparable Midtown space, most firms have remained in the Grand Central and Plaza Districts. The westward migration appears to have slowed down, until large blocks of Class A space in the under-construction Hudson Yards begin to hit the market in 2015 and beyond. 11.4% Percent of Class A market occupied by law firms 12.5% Percent of law firms comprising active tenants in the market 125 greater than 50,000 s.f. 96 Number of AmLaw 100 firms with offices locally Stagnant employment growth in legal services, increased consolidation and improving space efficiencies, have resulted in overall negative absorption for the industry. In June, the New York-based law firm Weil Gotshal announced that it would eliminate 60 salaried attorneys and 110 staff as the result of diminished demand for high-end legal services. The firm is just one of the many that have announced either layoffs or scaled-back recruiting efforts. As in the past, many law firms are opting to stay in place to avert significant relocation costs. Equally important, landlords have been reluctant to risk downtime and re-tenanting expenditures in a flat market. Simpson Thacher renewed for nearly 600,000 square feet at 425 Lexington Avenue in the largest law firm lease of the year. Of the top four law firm lease transactions year-to-date, all were renewals. When firms haves chosen to move in recent years, many have migrated to the west side of Midtown for more efficient, large block availabilities in new construction and in some cases downtown for higher-quality space at a discount to comparable spaces in Midtown. Over the next year, mergers and acquisitions could further erode the industry s total footprint. Growth where it exists has been in small to medium-sized firms, non-new York-based firms and those specializing in the legal needs of technology and media companies. These law firms have different space needs than Manhattan s more traditional firms with many opting for value spaces in less conventional buildings or locations outside Midtown s Trophy inventory. 2013 LAW FIRM COMPLETED TRANSACTIONS Simpson Thacher 425 Lexington Avenue 595,799 s.f. Patterson Belknap 1133 Avenue of the Americas 198,000 s.f. Baker Botts 30 Rockefeller Plaza 104,161 s.f. ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Weil Gotshal 500,000 Jones Day 400,000 White & Case 400,000 PRICING AND INCENTIVE AVERAGES $74.26 1.6% Class A asking rent ($ p.s.f) 15.0% 13.4% 20.1% Premium for Trophy space* Discount for negotiated rent* *rent difference from Class A average $56.00/$27.00 7/4 TI allowance ($ p.s.f.)** **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms Value options will become limited as demand from other industries, including technology and media, increases. Rents in top-tier Trophy buildings have increased as demand from hedge funds, private equity and wealth management expands. Limited new construction on the east side of Midtown could force some firms to move outside of traditional submarkets. Opportunities for law firms Landlords are eager to avoid the risk of down-time and cost of re-tenanting in a flat market. New construction in the Far West Side and Downtown will increase viable options. The potential rezoning of the area surrounding Grand Central Terminal and Park Avenue would provide for new development in a law firmconcentrated submarket. 2013 2014 2015 2016 2017
Jones Lang LaSalle Law Firm Perspective Global 2013 19 Philadelphia Locational preference: The majority of Philadelphia s law firms are located in the CBD s Market Street West submarket. This location provides easy access to abundant amenities and immediate proximity to the city s concentration of professional services companies. Despite upward rental pressure at Trophy product and limited availability of contiguous blocks, Market Street West will remain the core location for law firms. 20.2% Percent of Class A market occupied by law firms 8.7% Percent of law firms comprising active tenants in the market 23 greater than 50,000 s.f. 16 Number of AmLaw 100 firms with offices locally Following the highest volume of large law firm transactions in more than 15 years in 2012, renewals by Pepper Hamilton and Drinker Biddle in the first half of 2013 finalized near-term, large firm rollover, shifting demand to mid-sized firms in the Philadelphia CBD. Amidst no available Trophy blocks larger than 100,000 square feet and rents 25.0 percent below replacement cost rents, both firms opted to renew: Pepper Hamilton renewed in place and Drinker Biddle will reduce its footprint by 25.0 percent. While law firms continue to look at increasing space efficiency, less than 20.0 percent of transactions entailed rightsizing a cross sector shift exhibited in 2013 deal flow thus far. While alternatives exist across desirable Trophy and Class A assets, growing competition from mid-sized legal and financial services tenants will drive the decline of quality blocks, a catalyst for decreased tenant leverage and future Market Street West rent growth. Pond LeHocky, Hangley Aronchick and Weber Gallagher all between 30,000 and 60,000 square feet are currently in the market for space. These users additionally face competition from new users to the market: Law firms Gordon & Rees and Carroll McNulty secured new offices between 10,000 and 20,000 square feet at Trophy assets. 2013 LAW FIRM COMPLETED TRANSACTIONS Pepper Hamilton Two Logan Square 268,000 s.f. Drinker Biddle One Logan Square 155,000 s.f. with contraction Akin Gump Two Commerce Square 18,000 s.f. with expansion ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Pond LeHocky 60,000 Hangley Aronchick 40,000 Weber Gallagher 33,000 PRICING AND INCENTIVE AVERAGES $27.43 $0.50 Class A asking rent ($ p.s.f) 20.3% 10.0% 11.4% Premium for Trophy space* *rent difference from Class A average $40.00/$25.00 6/4 TI allowance ($ p.s.f.)** Discount for negotiated rent* **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms Stabilized Trophy and Class A landlords are pushing rents for quality availabilities. Competition is growing for mid-sized quality blocks of space, between 25,000 and 50,000 square feet. Inbound demand is spurring increased competition for space. Opportunities for law firms Pending large tenant leasing decisions could increase Trophy availability, softening concessions in the short term. Repositioned Class A assets will bring new alternatives to market. Availabilities for small-sized law firms, less than 10,000 square feet, remain abundant. 2013 2014 2015 2016 2017
20 Law Firm Perspective Global 2013 Jones Lang LaSalle San Francisco Locational preference: The vast majority of law firms prefer to office in high-profile buildings concentrated in or bordering the North Financial District, where there is a large concentration of premium Class A office product. Firms, especially within the AmLaw 100, also prefer to be located on higher floors with quality view space. 6.9% Percent of Class A market occupied by law firms 7.7% Percent of law firms comprising active tenants in the market 19 greater than 50,000 s.f. 44 Number of AmLaw 100 firms with offices locally Activity among law firms has been greatly subdued over the past year, conceivably one of the most stagnant periods in the last decade, as the legal industry still recovers from declines experienced during the recession. Firms that have managed to succeed, however, are those with strong ties to the thriving technology industry and start-up community, such as Fenwick & West, Wilson Sonsini, and Cooley. These firms, as well as other law firms that have remained competitive, are some of the few maintaining their current footprints or expanding. While law firms still experience moderate leverage in the market due to a significant amount of new supply coming online, the landlord community remains bullish as a result of the flourishing technology industry. Though, despite a slight rent premium for new construction, the capital expenditure involved in relocation is a bitter pill many law firms are unwilling to swallow. Although the shifting landscape of the market presents its own challenges, law firms in San Francisco strive to enhance the quality and culture of their firms through creating more efficient, collaborative and welcoming office space as they look out over the next 10 to 20 years. 2013 LAW FIRM COMPLETED TRANSACTIONS Gordon & Rees 275 Battery Street 50,195 s.f. McKenna Long & Aldridge 1 Market Plaza, Spear Tower 42,288 s.f. Sublease Allen Matkins 3 Embarcadero Center 39,825 s.f. ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Cooley 150,000 Coblentz Patch Duffy 85,000 Fenwick & West 60,000 PRICING AND INCENTIVE AVERAGES $57.63 3.0% Class A asking rent ($ p.s.f) 23.8% 5.0% 30.1% Premium for Trophy space* *rent difference from Class A average $48.00/$25.00 4/2 TI allowance ($ p.s.f.)** Discount for negotiated rent* **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms Law firms will continue to compete with high-growth technology tenants for large blocks of space. With several large lease expirations coming over the next two to three years, tenants will have to weigh their options as rents continue to rise. New supply slated to hit the market may prove cost-prohibitive for smaller firms. Opportunities for law firms A surge of new development delivering to the market this year will bring welcome relief to an otherwise supply-constrained market. As tech tenants compete over the hotly contested South of Market and South Financial District submarkets, large blocks of space remain available in the North Financial District. 2013 2014 2015 2016 2017
Jones Lang LaSalle Law Firm Perspective Global 2013 21 Washington, DC Locational preference: The majority of law firms are located in the CBD, East End and Capitol Hill submarkets of Washington, DC. New developments with efficient floorplates are also attractive to law firms. Given few large existing quality blocks of space in the core, many AmLaw 100 firms are considering future developments with several of these options located in fringe locations of the CBD and East End, increasingly the northern part of the CBD or the emerging Mount Vernon Triangle segment of the East End. 45.0% Percent of Class A market occupied by law firms 4.4% Percent of law firms comprising active tenants in the market 91 greater than 50,000 s.f. 95 Number of AmLaw 100 firms with offices locally Washington, DC is one of the top global law markets, containing the second highest number of lawyers in the country following New York. AmLaw 100 law firms located within the District of Columbia recorded profit growth of 4.6 percent year-over-year, primarily a reflection of firms ability to cut costs. In recent years, some Washington, DC law firms have seen top-line revenues stagnate or decline as fee compression has intensified. As a result, many law firms maintained profit margins by becoming operationally leaner, trimming overhead and shifting administrative functions to lower cost markets. In 2013, Pillsbury, Patton Boggs and K&L Gates were three firms that moved forward with plans to cut local payrolls and trim their downtown Washington, DC real estate holdings. The next wave of large law firm lease expirations is not set to occur for another few years, as over 4.0 million square feet of leases are set to expire over a 24-month period between 2016 and 2017. Large firms such as Hogan Lovells, Venable, Finnegan Henderson, Morgan Lewis and Steptoe & Johnson are expected to enter the market well ahead of their lease expirations in those years, evaluating both existing options and potential new developments. 2013 LAW FIRM COMPLETED TRANSACTIONS Arnold & Porter 601 Massachusetts Avenue, NW 375,000 s.f. Relocation Sidley Austin 1501 K Street, NW 289,000 s.f. Pillsbury 1200 17th Street, NW 108,000 s.f. Relocation ACTIVE LAW FIRM REQUIREMENTS IN THE MARKET (s.f.) Steptoe & Johnson 260,000 Reed Smith 80,000 Proskauer 75,000 PRICING AND INCENTIVE AVERAGES $59.50 2.3% Class A asking rent ($ p.s.f) 24.8% 5.0% 32.2% Premium for Trophy space* *rent difference from Class A average $95.00/$70.00 10/5 TI allowance ($ p.s.f.)** Discount for negotiated rent* **averages on 10-year new/renewal transactions Class A annual escalation Discount for sublease space* Free rent (months)** Challenges for law firms Quality existing blocks of space are dwindling and the under construction pipeline is 75.0 percent preleased. Prime locations for new developments are largely unavailable, so relocations to new construction may require being located farther off-metro in a fringe location. Potential for rent increases exists once the current oversupply in the market is reduced. Opportunities for law firms Competition in the marketplace is low given a finite number of near-term lease expirations and limited organic growth in the broader market. Concession packages remain at all-time highs and generous free rent and tenant improvement allowances have driven net effective rents down approximately 8.0 percent from their 2008 peak. 2013 2014 2015 2016 2017