How Should Law Firms Approach the Cycle’s Critical Point?

DALLAS—As a critical point in the cycle approaches, what should law firms consider when planning real estate strategies/? Whether focused on a particular legal market or evaluating strategies across a portfolio, a recent JLL legal report focuses on three principal questions for this discussion.

Are law firms facing increased competition from other sectors as Dallas market composition shifts/?

Law firms are the major driver downtown, with limited competition from other sectors. As a result, while suburban Dallas has recorded vacancies at roughly stable rates, at 19% since 2015, downtown has increased from 20% to 22.7%. Recent deliveries still offer firms new space and re-let options, especially in the CBD.

Is the market approaching an inflection point in the cycle? If so, when?

Despite solid class-A demand, vacancy is up more than 2 percentage points since 2015. Space efficiency, especially in the newest high-rent buildings, has begun to mute demand and slow annual rent growth, which is now 3.5%, down from 6% to 8% in 2016, suggesting the market is nearing a transition point in the next 24 months.

What is the near-term view on lease economics based on changing dynamics and a possible correction?

Recently introduced triple-net rents are standard in top-tier buildings, pushing expense and tax increases back to tenants. Uptown class-A rents, up 36% since 2012, may flatten, but no major downward shift is anticipated. Concessions, on the other hand, which have jumped 67% since 2015, have stabilized, but stand at record highs for Dallas.

“We’re continuing to see the trend of global firms that do not have a presence in Dallas entering our market. The season is upon us for recruiting lateral hires at year end to start a new office,” Brooke Armstrong, executive vice president of JLL, tells GlobeSt.com. “From a real estate perspective, there seems to be two strategies: occupy temporary space and determine the long-term outlook of the office before acting on something more permanent and the ‘if we build it, they will come’ strategy of identifying a permanent solution immediately.”

Armstrong says regional and local firms continue to look for value opportunities by hopscotching down a price tier. Some uptown firms are looking to the arts district for savings while some arts district firms are looking to the core for savings.

Here’s what JLL is tracking on a national basis: With 62.3 million square feet of construction in the US pipeline, 31.9% of which remains available, a combination of slower demand and increased supply will benefit firms. Concessions have surged by 46% in top US legal markets as landlords compete for a smaller group of tenants. JLL is forecasting that concessions remain elevated, rents are stabilized and even declining in the most supply-heavy markets through the end of the cycle. Since 2014, co-working space has grown by 17.7 million square feet across the US and is just another lever law firms can utilize to mitigate long-term real estate cost pressure risk.