U.S. Law Firms Re-Strategize Their Commercial Footprint: 4 Key Trends from JLL’s Law Firm Perspective

0 CommentsBy

By  Dan Adamski, Managing Director, JLL, and Rob Roe, Managing Director, JLL

Pittsburgh

Varied legal employment rates and an uncertain month-to-month economic outlook have caused law firms to rethink the way they use their office space. JLL’s 2016 U.S. Law Firm Perspective has conducted an extensive analysis of more than 40 U.S. markets, highlighting the biggest trends impacting law firm real estate based on supply and demand, rental rates, legal employment and concession packages. Experts found that while AmLaw 100 firms saw minimal gross revenue of just 2.7%, firms are looking to reduce their real estate costs.

As we head into 2017, opportunities exist for firms to relocate and construct their ideal workspace with an efficient floor plate; however, they’ll need to consider cost-saving methods, like right-sizing. Read on for the four biggest trends affecting U.S. law firms.

1. Economic Uncertainty Triggers Firms to Seek Consistent Revenue Growth

Though the U.S. economy still remains one of the most stable and established markets in the world, variance in month-to-month employment numbers have been less consistent recently. Economic shocks and dips in the legal services industry, like revenue per lawyer growth, have caused law firms to rethink their strategies to boost revenue.

Many firms have implemented a lower lawyer headcount within their offices, which has ultimately aligned with the minimal growth in legal services. Conservative growth is expected as we head into 2017. Ultimately, this trend simplifies real estate cost-containment strategies and office space estimates. Nearly all local markets are targeting fewer square feet per attorney, which will significantly reduce overall operating costs for firms.

Cleveland and Cincinnati, for instance, are seeing dips in legal employment, causing legal tenants to shift focus to space utilization adjustments. While many firms desire a central location in the urban core, quality downtown office space has become scarce in many markets. In Cleveland, firms are finding fewer availabilities in the Class A Trophy space combined with the conversion of a significant portion of downtown office space to apartments.

Markets like Detroit are also reducing their office space sizes; however, the city’s economic outlook has evolved over the last few years. Downtown Detroit is expanding beyond its traditional manufacturing base and increasing the number of jobs in professional services, like construction, tourism and technology. This presents more reliable, steady revenue opportunities for firms.

2. CBD Segments Will Soon Outperform Urban Cores

While many downtown centers are still in high demand from law firms, the upcoming delivery of nearly 48 million square feet of office space in the CBDs has given firms more options when relocating. With more than 57% of this CBD space still available for prelease, downtown vacancy rates may begin to rise as a result.

Firms with upcoming expiring leases in 2017 and 2018 will have more options when looking for a new space. Unless they’re looking to relocate to the CBD, they may experience challenges finding availability and negotiating their ideal lease.

Downtown Columbus’ Class A space is filling up and with rising rental rates, firms may need to shift their focus to CBD neighborhoods—like the Arena District and Capitol Square—for their next location. These neighborhoods are anticipating more than 600,000 square feet of office space over the next three years, with large blocks of it still available.

Similarly, Cincinnati’s downtown center is filling up with more residential and hospitality space. Class A office suites within the CBD are expected to open up as more creative agencies move to up-and-coming neighborhoods like Over-the-Rhine.

3. Firms Are Reducing Their Commercial Costs with Aggressive Right-Sizing

Inconsistent revenue growth, varying legal employment and rising rental rates have caused firms to look to their commercial office space needs to cut costs. Firms have begun to aggressively right-size in nearly all local markets, trimming down on a historical average of 976 square feet per attorney to 760 square feet. This presents an average of 22.2% in cost savings for firms.

Markets with steep rent costs per attorney, like Pittsburgh, Cleveland and Columbus, are among those right-sizing their offices. In Pittsburgh, where rental rates are peaking, the historic average rent per attorney totaled $35,000 at 1,050-1,150 square feet. The city’s current average benchmark now totals $30,000 at 950-1,050 square feet per attorney.

To boost efficiency, Pittsburgh firms are targeting an ideal floor plate size of 23,000 square feet. Firms are also targeting a significantly lower rent per attorney of $25,000 at 850-950 square feet.

In order to negotiate the best deal for space, firms should evaluate the market well in advance of their lease expiration date. Few trophy buildings with more than two contiguous floors are available, causing rental rates to climb in the near future, but. Pittsburgh’s CBD and Fringe are experiencing several large corporate downsizings and re-development projects that will provide some relief in the non-trophy segment.

4. Cost Savings Enable Firms to Invest in a More Favorable Space

Looking ahead to 2017 and 2018, rightsizing is expected to continue with firms targeting an average of 625 square feet per attorney. This would ultimately save more than 18% in rent, savings which can be used to build out a new office space that better fits their needs.

Firms can design office space that meets the needs of their new space utilization strategy. In some markets, landlords have also taken into account the new needs of firms and have overhauled their retention strategies.

Louisville landlords in the urban core have expanded building amenities to law firms in an effort to boost retention rates as firms seek out less costly options. Louisville firms are also targeting smaller benchmarks with rent per attorney targeted at $13,000 compared to the current benchmark of $17,000.

In markets like Pittsburgh, non-trophy Class A space faces upward pressure to meet the needs of firms unwilling to pay Trophy space rates. However, with large blocks of space opening up at U.S. Steel Tower and 525 William Penn Place, firms will have opportunities to evaluate space on the lower end of the Class A scale while simultaneously receiving hefty fitout allowances for realizing their newly strategized space strategy.

***

Despite varying economic circumstances and employment outlooks, law firms are finding new ways to adapt to their market conditions, notably through aggressive right-sizing strategies. As firms reevaluate their space needs, they are finding windows of opportunity in less traditional office spaces.

Download the Full Report

Image Credit: Always Shooting

About the Authors

Dan AdamskiDan Adamski is a Managing Director in JLL’s Tenant Representation Group where he is responsible for all client requirements in Western Pennsylvania and West Virginia. In this role, he focuses exclusively on Tenant Representation. Connect with Dan on LinkedIn or follow him on Twitter

 

 

 

Rob_RoeRob Roe is a Managing Director of JLL, Great Lakes Region and manages the Regional Brokerage Operation. He is responsible for providing real estate transaction representation and consulting services for JLL clients around the world. Rob’s brokerage background includes strategic planning, project consultation and execution of acquisitions and dispositions for clients’ portfolios. Connect with Rob on LinkedIn or follow him on Twitter

Leave a Reply

Your email address will not be published. Required fields are marked *