CHICAGO—For the first time in seven years, landlords in half of the US cities with high concentrations of top law firms now have the upper hand in lease negotiations, according to a new Jones Lang LaSalle analysis. Building owners, especially those in cities that have strong energy and technology sectors, can charge higher rents and offer reduced concessions. However, JLL also found that landlords in cities with the greatest concentration of law firms still offer quality space at affordable rates.
“Although a lot of secondary and tertiary markets are turning with rent growth and concession compression, primary law firm markets such as New York, Washington D.C. and Los Angeles will continue to offer firms leverage over the next 18 months,” says Elizabeth Cooper, international director and co-lead of JLL’s law firm practice group. “This is due to economic challenges and financial service, law and consulting firms continuing to reduce their footprints, which adds second-generation space options to existing supply in these markets.”
The JLL law firm group tracks the top 41 US legal markets. In 2012, 64% of these markets were considered law-firm favorable. But the JLL researchers expect that, by 2016, most of the markets that remain friendly to lawyers will also shift in landlords’ direction. “The new market dynamics reflect the pace at which the law firm sector is leasing additional office space, even as firms use an average of one-third less space per attorney (down from 900 square feet to 600 square feet),” they find.
They found that rents grew in the technology hubs of San Francisco and Seattle by 12.2% and 5.3%, respectively, compared to one year ago, when on average, rents in the 41 cities grew by 2.1%. The energy sector also drove up rates by 3.5% in Houston and 5.6% in Pittsburgh.
Nearly 70% of these cities project rent increases in 2014, and even more in 2015. However, most of these increases will occur in the smaller cities, while the global hubs of New York, Washington, DC, Los Angeles, Paris, Madrid, Shanghai and Sydney should continue favorable leases for at least another year.
“Despite modest economic growth, we are headed toward a landlord’s market in all global regions,” explains John Sikaitis, JLL director of office research. “This is a potential challenge for firms with expiring leases that are posting stagnant revenues. However, it’s good news that in many cases, revenue growth, practice group diversification and rental rate increases go hand-in-hand, in economically-growing locations such as Houston, Denver, Miami, Minneapolis and San Francisco.”