SAN DIEGO—The trend of law firms moving up to higher-priced real estate in UTC and Del Mar Heights has been happening since the early 2000s, and they will continue moving north to be closer to where decision-makers live and clients work, JLL EVP Misty Moore tells GlobeSt.com. The firm recently released its law-firm report, which revealed that in San Diego's higher-rend markets of UTC and Del Mar Heights, overall tenant demand is slowing, which has opened up quality space opportunities to accommodate law firms. However, rents in these markets remain at or above peak, presenting a challenge.

The report also showed that Downtown has yet to see any meaningful amount of new class-A office construction suitable for law firms, and as a result remains a tight, landlord-friendly market for firms, with pricing continuing its upward trend.

JLL predicts that pricing will likely level out as incremental new supply is delivered to UTC and Del Mar Heights and tenant demand continues to cool and that Downtown pricing should continue to climb in the near future due to the low vacancy rate and lack of new product.

In addition, according to a new report from CBRE, law firms are adjusting their real estate strategies in response to advances in technology, shifting client demand, aging workforces and intense competition to attract and retain skilled talent, . Most commonly, law firms are contracting their space, resulting in a reduced footprint of 27% on average between Q1 2016 and Q2 2017. This change in workplace strategy in the legal space is particularly important in Downtown San Diego. “Downtown San Diego's office market was the 'golden child of 2016,' experiencing the strongest absorption and office rental rate growth of any submarket countywide in 2016,” says Mike Hoeck, SVP of CBRE in San Diego, in a prepared statement.

“Law firms in San Diego are being much more thoughtful and strategic about their real estate,” adds Hoeck, commenting that while law firms are rarely first adopters, they are beginning to pivot like other industries as a result of generational changes, reductions in staff and innovation in technology. “We are seeing space design revolve more around long-term flexibility, creating a better sense of community and with a focus on efficiency.” The changes we are seeing in the industry locally are on trend with what is happening nationally, he says.

Law firms are aggressively responding to the challenges that technology advancement, client demand and a shifting workforce pose for their future, CBRE reports. San Diego currently has 12,500 professionals in legal services and 7,350 lawyers, and the region has seen a positive 24.6% growth of lawyers since 2010. In San Diego, many firms continue to want trophy properties and desire more-efficient floor plans in buildings that offer amenities to employees.

“Despite being rooted in tradition and precedence, many law firms are employing new real estate strategies when lease expirations present opportunities–in particular, space contraction and workplace strategy,” says Jamie Georgas, global chair of CBRE's Law Firm Practice Group, in the statement. “Law firms with leases expiring in the near term are reconsidering long-held assumptions about how their attorneys work and, when determining their space needs, the services and technology they need to be most effective.”

We spoke with JLL's Moore about law firms' tolerance for and attraction to high-rent submarkets in San Diego and what she expects to see in terms of this attraction in the future.

GlobeSt.com: Will law tenants make the leap to high-priced markets like UTC and Del Mar Heights in order to have the prestige and amenities an office there affords them?

Moore: The trend of law firms moving up to higher priced-real estate in UTC and Del Mar Heights has been happening since the early 2000s. Law firms were, and continue to be, moving north to be closer to where their decision-makers live and where their clients work. The growth of tech and lab companies in Sorrento Mesa and Torrey Pines has pushed a lot of their service providers to be closer to their clients' offices.

GlobeSt.com: Which types of law firms are most concerned about being in a highly desirable market in order to attract talent (and possibly clients)?

Moore: Most law firms are concerned about being centrally located so their employees have a tolerable commute and their clients don't have to go far to find them. The only exception would be firms who do a lot of business outside of San Diego, who may prioritize proximity to the airport. San Diego has a surprising number of attorneys at AMLaw 200 firms who do a majority of their work outside San Diego.

GlobeSt.com: Which submarkets present the best opportunity for quality space at lower rents?

Moore: The overall San Diego office market remains strong today, with Downtown seeing the most rent growth due to the lack of new class-A development on the immediate horizon. UTC and Del Mar Heights, however, are seeing new speculative class-A construction, which will put pressure on absorption and in the end, on rental rates. Additionally, law firms continue to right-size by getting rid of large partner offices, law libraries and file rooms, which is creating more overall vacancy in these law firm-heavy markets.

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