Amidst Rising Rents and Falling Vacancies, North American Law Firms Seek Efficiencies
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North America Report LAW FIRM SERVICES 2016 Year-End Review & Outlook Amidst Rising Rents and Falling Vacancies, North American Law Firms Seek Efficiencies Like so many industries, law firms are under increasing pressure to U.S. Office Market | Q4 2014 - Q4 2016 approach real estate strategies and workplace practices differently 35 14 in order to remain competitive. 2016 intensified this pressure 30 thanks to rising office rents and falling vacancies in many markets. 13.5 25 13 To provide insight into the key real estate trends for law firms to 20 (%) consider, this report highlights the office market characteristics MSF 15 12.5 and law firm activity in each of the 23 North American real estate Vacancy markets covered by Colliers International’s Law Firm Services 10 12 Group. These comparisons reveal notable differences across 5 markets as well as striking consistencies as many firms strive 0 11.5 to heighten efficiencies while creating workplaces that drive Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 collaboration and superior client service. Absorption (MSF) New Supply (MSF) Vacancy Rate (%) Source: Colliers International A rising number of occupiers are choosing to renew their existing Despite Slowing Growth, Further Upside leases rather than relocate, signaling a cautious mood. Four of the Remains for U.S. Office Market top five lease transactions in Manhattan in Q4 2016 were renewals. Renewals also led recent leasing activity in markets from Atlanta The U.S. office market seems to be reaching equilibrium. While to Chicago to Miami. Cost control and more efficient space usage rents increased modestly in 2016, rent growth has slowed continue to factor into the decision-making process. Where moves considerably and vacancies appear to be bottoming out. Absorption are occurring, more tenants are reducing their footprints and also shifted down in 2016 as consolidation, downsizing and consolidating into single buildings. renewals became more prevalent. The volume of office space under construction has risen to 110 At the peak of the prior cycle in 2007, the national office vacancy million square feet, equivalent to 1.8% of the total U.S. office rate fell to a low of 12.2%. In 2016, the vacancy rate held at virtually inventory. Of this, 42.5 million square feet is underway in the same level, falling slightly in Q4 2016 to 12.3%. While Class A downtown markets and 67.5 million square feet is in the suburbs. rents in most markets are holding firm or growing at a reduced pace, tenant incentive packages are increasing in some locations where Four markets dominate the construction picture, accounting for almost vacant new supply is being added or occupiers are moving out. half of the current activity: Dallas, Manhattan, the San Francisco Bay Area and Washington, D.C. Future deliveries are heavily front-loaded, Average Class A asking rents closed out 2016 at $46.90 per with 68% of space underway set to deliver in 2017. In total, 62% of square foot in downtown areas and $29.05 per square foot in the space underway is pre-leased, but more developers are now building suburbs. Both figures represent annual gains, but the pace of rent speculative projects in select primary locations. appreciation has slowed. Class A downtown asking rents rose by Quarterly Under Construction Totals 4.1% in 2016 compared to 2.7% in suburban markets, down from 140 12-month growth rates in Q3 2016 of 7.6% and 3.3%, respectively. 120 Net absorption fell significantly in 2016 as occupiers sought to 100 limit real estate costs. New leasing activity has been restricted by 80 the increase in downsizing, consolidation and renewals as well Millions 60 as backfilling shadow space. Still, increased GDP growth in 2017 40 could help offset this trend. If enacted by the new administration, deregulation and business tax reductions may lead to demand 20 gains, though it will take some time to filter through the market. 0 Q1 2011 Q3 2011 Q1 2013 Q1 2015 Q1 2016 Q1 2014 Q1 2012 Q1 2010 Q3 2013 Q3 2015 Q3 2016 Q3 2014 Q1 2007 Q3 2012 Q3 2010 Q1 2009 Q1 2005 Q1 2008 Q1 2006 Q3 2007 Q3 2009 Q3 2005 Q3 2008 Q3 2006 Under Construction Average Source: Colliers International In 2016, Most Law Firm Markets Saw Rents Over half (57%) of markets saw office vacancy declines in 2016. One-quarter (26%) experienced a rise in the vacancy rate, led by Rise and Vacancies Fall Dallas, where vacancy is 8.5 percentage points above the U.S. market average. Our analysis of the office landscape and law firm activity in the 23 North American markets represented by Colliers’ Law Firm Average vacancy across the markets surveyed was 12.7% in Services Group reveals notable differences across the markets. The 2016, slightly above the U.S. national rate of 12.3%. The lowest focus of this analysis is on each metro’s downtown office market, downtown vacancy rates are in the Canadian markets — Toronto where the significant majority of law firms are located. and Vancouver — at 6.3% and 6% respectively. In addition to the markets with the highest rents (Manhattan and San Francisco), In 2016, office rents ranged from under $20 per square foot in three other U.S. markets included in the survey have sub-10% Minneapolis to just under $58 per square foot in Washington, D.C. vacancy rates: Long Island, Nashville and Philadelphia. to around $75 per square foot in Manhattan and San Francisco. The average rent across the 23 markets is $36.09 per square foot, but this is somewhat skewed by Manhattan and San Francisco. In Renewals Dominate Law Firm Leasing addition to Washington, D.C., only five other markets have rents Activity above the average: Chicago, Fairfield County, Houston, Los Angeles and South Florida, all of which are in a range of $40–$45 per Renewals are the name of the game as law firms look to control square foot. their real estate costs. Seven of the 10 largest law firm leases signed in 2016 involved tenants choosing to stay in place and The majority (61%) of the markets saw Class A rents increase in renew their existing leases. Looking at the three largest law firm 2016 with the largest percentage gains occurring in Atlanta, San leases signed in each market in 2016, all but two included at least Diego, South Florida and Midtown South in Manhattan — all of one renewal. which grew at more than twice the national rate. The largest fall — albeit just over 3% — was in Houston, where the final aftershocks from the energy sector fallout are occurring. North American Office Markets | Q4 2016 MARKET CLASS A DOWNTOWN ASKING RENT DOWNTOWN VACANCY RATE MARKET SENTIMENT LAW FIRMS SEEKING NEW SPACE Atlanta, GA $27.10 14.2% Equal Footing Up Birmingham, AL $20.64 9.0% Tenants' Favor Down Chicago, IL $42.46 11.3% Landlords' Favor Static Dallas, TX $30.12 20.8% Landlords' Favor Static Denver, CO $35.20 12.8% Tenants' Favor Static Fairfield County, CT $43.99 23.6% Equal Footing Static Hartford, CT $22.59 13.6% Tenants' Favor Static Houston, TX $44.64 16.8% Equal Footing Static Long Island, NY $30.63 8.6% Landlords' Favor Up Los Angeles, CA $41.40 18.2% Landlords' Favor Static Manhattan, NY $78.64 6.4% Equal Footing Static Milwaukee, WI $21.58 12.4% Landlords' Favor Up Minneapolis, MN $18.23 15.4% Equal Footing Down Nashville, TN $29.63 7.0% Landlords' Favor Up Northern New Jersey $29.58 16.9% Tenants' Favor Static Philadelphia, PA $30.57 9.6% Landlords' Favor Down San Diego, CA $35.76 14.7% Landlords' Favor Static San Francisco, CA $74.62 6.6% Landlords' Favor Down South Florida $41.24 11.5% Landlords' Favor Up Toronto, ON, Canada $21.86* 6.3% Landlords' Favor Down Vancouver, BC, Canada $22.46* 6.0% Landlords' Favor Static Washington, D.C. $57.82 10.9% Tenants' Favor Static Westchester County, NY $30.51 16.6% Equal Footing Up *Converted to USD Note: Directional indicators reflect YOY change Source: Colliers International 2 North America Report | 2016 Year-End Review & Outlook | Colliers International Top 10 Law Firm Leases Signed in 2016 LAW FIRM SF LEASED BUILDING NAME ADDRESS MARKET NEW LEASE OR RENEWAL QUARTER Sidley Austin LLP 575,000 One South Dearborn 1 South Dearborn Street Chicago Renewal Q4 Winston & Strawn LLP 430,000 Leo Burnett Building 35 West Wacker Drive Chicago Renewal Q2 Milbank, Tweed, Hadley & McCloy LLP 257,567 55 Hudson Yards 55 Hudson Yards New York New Q3 Duane Morris LLP 248,616 United Plaza 30 South 17th Street Philadephia Renewal Q3 Troutman Sanders LLP 230,146 Bank of America Plaza 600 Peachtree Street Atlanta Renewal Q3 Dentons 207,371 1221 Avenue of the Americas 1221 Avenue of the Americas New York Renewal Q3 Hogan Lovells 206,720 390 Madison Avenue 390 Madison Avenue New York New Q4 DLA Piper 199,222 1251 Avenue of the Americas 1251 Avenue of the Americas New York Renewal / Expansion Q1 Foley and Lardner LLP 197,000 U.S. Bank Center 777 East Wisconsin Avenue Milwaukee Renewal Q3 Paul Hastings LLP 140,000 City National Plaza 515 South Flower Street Los Angeles Renewal / Downsize Q1 Source: Colliers International Four of the top five leases across markets were renewals. Sidley Austin and Winston & Strawn led this activity in recommitting to Office Market Sentiment a combined 1 million square feet of space in downtown Chicago. The largest new lease signed in 2016 was at 55 Hudson Yards in Manhattan, where Milbank, Tweed, Hadley & McCloy LLP took 257,567 square feet.