Law Firms Face Opportunities and Rising Uncertainty

DALLAS—Heading into the final weeks of 2019, law firms are being presented with broadening opportunities as well as rising uncertainty and challenges of increasing complexity. These firms are also posting record M&A activity which is leading to greater scalability and a resilient domestic macroeconomic environment, contrast with geopolitical challenges. Some of these issues range from trade disputes to Brexit, according to JLL’s recent law firm report.

At the same time, succession planning and talent shortfalls are hampering the opportunities presented by an array of large-block options across price ranges and markets in the United States. In the near term, however, firms will still be able to take advantage of a combination of broad-based growth and a more favorable leasing environment, says the report.

Uncertainty is mounting for global growth

After several years of solid performance, global GDP is forecasted to stabilize in the near term, with major third parties slightly downgrading estimates by roughly 10 to 20 basis points per year. The IMF projects that advanced economies’ growth will decelerate to 1.9% by year-end, with a further cooling to 1.7% in 2020.

On the other hand, volatility continues to dominate emerging economies, within which trajectories are more variable and dependent upon trade negotiations and in-bound capital investment.

These trends, as well as a continued hollowing of the middle of the top 100 firms, are expected to continue given a lack in the slowdown of consolidations. At the current pace, year-end law mergers will be only marginally below the triple-digit rates seen in 2017 and 2018. This level of consolidation will also have knock-on effects to the office market, enabling both more large-scale relocation to new supply and a rise in sublease availabilities that need to be backfilled at even more favorable terms, says JLL.

At the current rate of activity, 2019 will be the third-highest year for M&A on record. Within the legal sector, shifts in global GDP growth are of particular importance given the industry’s recent strong earnings performance. Gross revenue for AmLaw 100 firms jumped by a decade-high 8% and is within reach of the $100 billion threshold, while profits rising nearly 73% faster than revenue demonstrate the success of lateral M&A activity as well as other efficiency drives.

Law firms’ intense concentration in CBD class-A space disproportionately means this is the first major segment to register meaningful inflection in office market conditions. Since early 2017, asking rents for law firm-specific product have wobbled around the $51-per-square-foot mark as give-backs of lower-priced blocks outpace newer high-priced options hitting the market and sublease space now exceeds 12 million square feet. More importantly, growth in concession packages is far outpacing that of asking rent growth in order to account for spiking build-out costs, exerting significant pressure on effective rents and leveling the playing field in many instances between firms and landlords, according to the report.

Meanwhile, concessions continue to rise with little sign of slowing down, helping to buffer effective rent growth. As 2020 approaches, firms should see little change in this dynamic as economic growth is balancing out what would otherwise be a near-oversupplied market. Large-scale pipelines will be most useful for firms in New York, Washington, DC, Houston, Chicago and Atlanta, while firms in San Francisco, Los Angeles, Boston and Seattle will continue to run into fierce competition from tech and other growth users for limited blocks of space at top-end pricing. During the longer term, however, cooling employment growth and broader stabilization/correction from some larger users will benefit law firms as these tenants negotiate a structurally changing real estate landscape.

On a local level, law firms continue to take top-tier space in Uptown Dallas and the CBD as new supply delivers, with much of it setting rental rate records. Although the Dallas region remains one of the fastest-growing in the country, large-scale corporate relocations are largely taking place in the suburbs, reducing some competition for space in the urban core. The development pipeline in the downtown has recently picked up, suggesting that new top-end space will continue to be available during the near to mid-term, says the JLL report.

“To a large extent, the priorities of the new leaders making real estate decisions for their respective law firms are similar to what was important to their predecessors,” Brooke Armstrong, JLL managing director/Dallas office tenant rep lead, tells GlobeSt.com. “They still have a focus on personal space, head-down work, image and amenities, but now there’s increasing emphasis on attracting and retaining talent in this highly competitive market to increase business and achieve higher profit margins.”