Law firm perspective
After more than eight years of expansion, the delivery of nearly 30 m.s.f. of top-quality space in CBDs throughout the country is reshaping the environment for firms. Many are focusing on their real estate strategy in order to take advantage of lower rents as the 10-year mark from transactions done during the recession approaches. Although new supply is more than 34% more expensive than existing Class A space, TI allowances in a number of law firm markets such as Washington, DC have trended to $150 p.s.f., while in Houston and Chicago, they have surpassed or are approaching $100 p.s.f.
With the cycle reaching new heights and tenants facing limited growth, the amount of additional space that tenants will occupy in net terms in 2018 will likely be 12 m.s.f. lower than 2017. The share of expansionary leases is beginning to decline, as corporates such as tech and life sciences face talent shortages and industries such as finance begin to pull back on growth as the peak of the cycle approaches. This has been noticeably acute in tech: only around 63% of tech leases in 2018 have been expansionary compared to over 85% in the previous three years. As tech and finance have been the greatest competition for the types of space that law firms desire most, this cooling will provide for a wider array of options for firms.
Law firms will have an opportunity to take advantage of flatlining, or even declining, effective rents in many high-profile locations on an annual basis. For rightsizing tenants, this is enabling additional cost containment compared to rightsizing alone. These trends are only going to intensify in the coming quarters, providing needed relief after years of constraints and lessening the impact of intra-industry competition as the law firm expiration pipeline heats up in the coming years.
Here are four things to keep an eye on in the coming months:
Tech and finance continue to compete with firms for space
Law firms continue to be an important leasing driver, but face sustained competition from tech and finance.
Coworking’s rapid growth is placing pressure on core space that firms desire
Flexible space providers in New York and DC have combined to increase their footprints more than tenfold.
A talent shortfall across markets is helping to cool the market
Job openings have now surpassed unemployment which indicates significant labor shortfalls.
The supply wave will significantly shift conditions in favor of law firms
U.S. markets are on the verge of a tipping point and will become even more tenant-favorable in 2019.