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. 22% In some markets — most notably Manhattan — tenant options are restricted by a limited availability of large blocks of new space. Conversely, in order to achieve pro-forma rents, landlords and 52% developers in some markets are resorting to significant incentives. 26% One example is Washington, D.C., which is facing a surfeit of new deliveries.
Half of Key Law Firm Markets are Positioned in Landlords’ Favor Tenants' Favor Equal Footing Landlords' Favor Note: Data as of Q4 2016 Source: Colliers International To gain insight into market sentiment and the requirements of law firms actively seeking space to lease, we polled our Law Firm Services Group on trends in their markets. Law Firms Seeking New Office Space
Reflecting the aforementioned trend of rising rents and falling vacancies, 52% of respondents view their markets as being positioned in the landlords’ favor, with another 26% reporting that landlords and tenants are on equal footing. Only five markets were 25% 25% identified as favoring tenants, with Washington, D.C. being the most prominent.
In terms of law firms seeking new space, the number of markets where requirements were viewed as being unchanged over the past year accounted for 50% of survey responses. The remaining 50% 50% were split evenly between markets where requirements were on the rise and those where the number of firms seeking space had fallen.
The leading markets with more active law firm requirements were Increased Static Declined Atlanta and South Florida, where rent growth in 2016 was among Note: YOY change as of Q4 2016 Source: Colliers International the strongest seen in the survey. Markets with a falling number of requirements were led by Minneapolis, San Francisco and Toronto.
3 North America Report | 2016 Year-End Review & Outlook | Colliers International Law Firms: Evolution, Strategy and Prospects
As markets throughout North America have continued to see rising rental rates over the past five to six years, law firms have felt the pressure to look at their real estate strategies and practices differently.
From a real estate perspective, many law firms have started to conform to the practices of other sectors. Law firms have not been as aggressive as other industries in going to open-plan environments because 75% of their activity is still “heads-down” work. However, many firms have become more efficient with their spaces. Most firms have minimized overhead by renewing and restacking in their existing spaces to reduce improvement costs. Those that have chosen to relocate have generally moved to new developments with space plans that are dramatically more efficient due to factors such as floorplate dimensions, mullion spacing and office size reduction.
From a practice perspective, firms are collaborating more and offering additional services across specialty lines in an effort to efficiently provide clients with improved service. They have also made great strides in offering more transparency and predictability to clients. This has enabled firms to implement modest rate increases of 3%–4%, while reducing the overall cost of services to clients.
However, there continues to be more and more pressure on firms to negotiate hourly-fee arrangements and trim any excess. Over the past 10 years, we have slowly seen headcounts go down about 5%. Many of the major firms with large presences in the most expensive markets have looked at outsourcing tactical functions to less expensive markets, less expensive space in the same markets or less expensive spaces within their existing buildings.
Moving forward, we should see rents reach an inflection point in most markets throughout the country thanks to a confluence of new construction deliveries and an abundance of sublease space coming on the market. We are already seeing the beginning of this in markets like Denver, CO; Houston, TX; Long Island, NY and Northern New Jersey.
Combined with these events, if anticipated deregulation and business tax reductions come to pass, we expect that many law firms will see a significant uptick in new business and revenue while also being able to reduce rent expenses.
4 North America Report | 2016 Year-End Review & Outlook | Colliers International ATLANTA
The Atlanta market is stabilizing, as office vacancy is moving downward and rents are up by more than $2 per square foot from a year ago. 2016 drew to a close with almost 1 million square feet of positive absorption in the second half of the year. Encouragingly, demand is spread across a range of sectors led by finance, insurance and law firms.
Tenants remain focused on Midtown and Cumberland/Galleria, which collectively accounted for 50% of leasing across the city in 2016. Some leasing activity is also beginning to leak into downtown due to space restraints in Midtown. Q4 2016 Key Indicators | Atlanta
Atlanta’s law firms are hiring but also looking to achieve efficiencies, so Class A Asking Rent (PSF) $27.10 the absorption of new space does not match the increased headcounts. Downtown Vacancy Rate 14.2% New space designs are focused on integrating technology, reducing paper and increasing collaboration in the workplace. Number of Law Firms in the Market Up
Market Sentiment Equal Footing
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Atlanta
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Troutman Sanders LLP 230,146 Bank of America Plaza 600 Peachtree Street Renewal Q3
Swift, Currie, McGhee & Hiers LLP 115,428 The Peachtree 1355 Peachtree Street Renewal/Expansion Q3
BakerHostetler 67,960 The Proscenium 1170 Peachtree Street New Q2
Source: Colliers International BIRMINGHAM
With its modest office inventory of 5.1 million square feet, downtown Birmingham witnessed healthy performance in 2016. Vacancy fell to 13.8% in Q4 2016 from 14.2% in Q3 2016, and annual net absorption was positive.
The downtown Class A market is even tighter with a Q4 2016 vacancy rate of 9% — 70 basis points (BPS) below the Q3 2016 level. However, these improvements have yet to filter through to widespread rental growth. Downtown Class A asking rents rose by just 30 BPS in 2016.
Q4 2016 Key Indicators | Birmingham While law firm headcounts are growing, law firm footprints are Class A Asking Rent (PSF) $20.64 shrinking. Law firms are using lease events (e.g., contraction or renewal options) as catalysts for right-sizing. Downtown Vacancy Rate 9.0%
Number of Law Firms in the Market Down
Market Sentiment Tenants’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Birmingham
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Balch & Bingham LLP 116,952 Regions Harbert Plaza 1901 6th Avenue North Renewal Q4
Hand Arendall LLC 20,000 The Federal Reserve Building 1801 Fifth Avenue North New Q4
Lloyd, Gray, Whitehead & Monroe 19,000 880 Building 880 Montclair Road New Q2
Source: Colliers International
5 North America Report | 2016 Year-End Review & Outlook | Colliers International CHICAGO
Chicago’s downtown office market is likely as tight as it is going to get this cycle, as the vacancy rate sits at a 16-year low. Rents continue to climb across all submarkets, eclipsing all-time highs. Further rent growth — albeit slowing — is anticipated this year.
An additional 2.1 million square feet is under construction, most of which is set to deliver in 2018. More than half of this space is pre- committed. Downtown Chicago is also attracting major relocations, both from the suburbs and outside the city.
Two office towers were recently completed, adding 2.4 million square Q4 2016 Key Indicators | Chicago feet of new trophy space in the West Loop. The two properties, 444 West Lake and 150 North Riverside Drive, are already 80% leased. Class A Asking Rent (PSF) $42.46 While the developers of the new office towers approached multiple law Downtown Vacancy Rate 11.3% firms as prospective tenants, virtually every one of them was looking to downsize in their existing buildings. Number of Law Firms in the Market Static
Market Sentiment Landlords’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Chicago
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Sidley Austin LLP 575,000 One South Dearborn 1 South Dearborn Street Renewal Q4
Winston & Strawn LLP 430,000 Leo Burnett Building 35 West Wacker Drive Renewal Q2
Reed Smith 109,142 CME Center 10 South Wacker Drive Renewal Q4
Source: Colliers International DALLAS
Dallas office vacancy continues to shift upwards in modest increments. Vacancy stands at 13%, up 110 BPS from a year ago. Absorption turned positive in Q4 2016 and should get a boost from tenants taking occupancy of space under construction. Less than 35% of the space delivered in 2016 is still available.
Reflecting tightness in the Uptown area, the 530,000-square-foot McKinney & Olive project is more than 90% leased less than six months after completion. However, rents have increased over the past year by $1.13 per square foot to $30.12. Class A assets in prime Q4 2016 Key Indicators | Dallas locations have seen rents break the $40 per square foot barrier, with some deals achieving upwards of $50 per square foot. Class A Asking Rent (PSF) $30.12
Downtown Vacancy Rate 20.8% Dallas’ law firms are continuing to find ways to be more efficient with their space requirements. The trend of firms relocating from downtown Number of Law Firms in the Market Static to Uptown continues — partially driven by the need to recruit and retain top talent — even though Uptown rates can be nearly double the Market Sentiment Landlords’ Favor rents downtown. Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Dallas
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Jackson Walker 104,000 KPMG Plaza at Hall Arts 2323 Ross Avenue New Lease/Relocation Q4
Vinson & Elkins LLP 85,000 The Union Field Street & Cedar Springs New Lease/Relocation Q4
Strasburger & Price LLP 65,805 Bank of America Plaza 901 Main Street New Lease/Relocation Within Building Q4
Source: Colliers International
6 North America Report | 2016 Year-End Review & Outlook | Colliers International DENVER
The metro Denver office market’s resiliency has endured throughout the past two years as vacancy has stabilized and absorption remains positive. Confidence in the market is apparent as speculative office construction continues to increase despite some indications we may be nearing the end of this cycle. As several transit-oriented developments take shape around the metro, developers are confident in their abilities to attract future occupiers with public transportation.
Although market indicators in the central business district (CBD) suggest the submarket has peaked, demand for newer space is still evident. The metro’s three largest leases signed during Q4 2016 were Q4 2016 Key Indicators | Denver for Class A product in the CBD totaling more than 260,000 square feet. Class A Asking Rent (PSF) $35.20
Law firms in Denver are looking to cut costs and be more efficient with Downtown Vacancy Rate 12.8% their real estate. Law firms are primarily focused on leasing Class A space in Lower Downtown (LoDo), particularly new construction. But Number of Law Firms in the Market Static as LoDo options tighten, they are being forced to look closer to 16th Street and 17th Street in the CBD. Market Sentiment Tenants’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Denver
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Holland and Hart LLP 110,000 555 17th Street 555 17th Street Renewal Q2
Polsinelli PC 80,000 1401 Wewatta Street 1401 Wewatta Street New Q2
Moye White LLP 50,000 16 Market Square 1400 16th Street Renewal Q1
Source: Colliers International FAIRFIELD COUNTY, CT
The Fairfield County office market saw modest improvement in 2016. The overall vacancy rate fell from 17.4% to 16.7% while average asking rents rose from $34.35 per square foot to $35.71 per square foot. These trends were reversed in the Stamford CBD, where vacancy increased from 22.4% to 23.6%, which is the highest rate of the six submarkets in Fairfield County.
While average asking rents in the Stamford CBD fell by $1 in 2016 to $43.99 per square foot, they are the second-highest in Fairfield County — topped only by Greenwich, where rents are $60.96 per square foot. Q4 2016 Key Indicators | Fairfield County Several local law firms, both large and small, have been in contraction Class A Asking Rent (PSF) $43.99 mode for a few years now. The underlying reasons include factors like Downtown Vacancy Rate 23.6% the creation of space efficiencies, the greater utilization of technology and the increased ratio of lawyers to assistants. Firms like Day Pitney, Number of Law Firms in the Market Static Robinson Cole, Shipman & Goodwin and Anderson Kill have all seen their footprints get smaller. Market Sentiment Equal Footing
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Fairfield County
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Finn Dixon & Herling LLP 26,385 6 Landmark Square 6 Landmark Square New Lease Q1
Withers Bergman LLP 17,589 1700 East Putnam Avenue 1700 East Putnam Avenue Renewal Q1
Ryan Ryan Deluca LLP 12,351 1000 Lafayette Boulevard 1000 Lafayette Boulevard New Q4
Source: Colliers International
7 North America Report | 2016 Year-End Review & Outlook | Colliers International HARTFORD
Although vacancy levels remain above the U.S. average, the downtown Hartford office market is showing signs of improvement. Class A vacancy fell by 60 BPS in Q4 2016 to 15.3%. Downtown Class A asking rents grew by 3% in 2016 compared to the U.S. average of 4.1%. In addition, net absorption turned positive in Q4 2016.
Law firm occupancy fundamentals in Hartford remain stable. Total occupancy for the 20 largest firms remains at approximately 753,000 square feet. Operational trends for existing firms are slowly following national trends in the areas of design, staffing ratios, hiring practices and tenant improvements. There have been no recent mergers in Q4 2016 Key Indicators | Hartford the market. Class A Asking Rent (PSF) $22.59
Downtown Vacancy Rate 13.6%
Number of Law Firms in the Market Static
Market Sentiment Tenants’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Hartford
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
McCarter & English 33,000 CityPlace I 185 Asylum Street Renewal Q4
Nirenstein, Horowitz & Associates PC 7,880 Somerset Square 200 Glastonbury Boulevard New Q2
Source: Colliers International HOUSTON
Houston’s office market remains challenged, but it is showing early signs of stabilization and even continued growth in the year ahead. Absorption in the CBD turned modestly positive in Q4 2016 after being deep in the red the prior quarter. Vacancy — at 16.8% — is up from a year ago but started to inch down in Q4 2016.
In a marked shift, Q4 2016 witnessed several energy companies take their sublease spaces off the market as they began to move out of contraction mode. Even so, two-thirds of sublease space available is of secondary quality with sublease space in the CBD skewing toward Q4 2016 Key Indicators | Houston Class B properties built in the 1980s. With limited attraction, this space could remain unoccupied for some time until market conditions justify Class A Asking Rent (PSF) $44.64 upgrades or the rental rate gap between Class A and Class B space Downtown Vacancy Rate 16.8% widens.
Number of Law Firms in the Market Static Law firms in Houston continue to grow through consolidations and new firms entering the marketplace. With the aftershocks of the energy Market Sentiment Equal Footing sector collapse still being felt, some firms are tightening their budgets and space needs. Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Houston
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Kirkland & Ellis LLP 62,000 609 Main at Texas 609 Main Street New Q4
Thompson & Knight LLP 60,655 BG Group Place 811 Main Street New Q3
Orrick, Herrington & Sutcliffe LLP 56,806 609 Main at Texas 609 Main Street New Q3
Source: Colliers International
8 North America Report | 2016 Year-End Review & Outlook | Colliers International LONG ISLAND
Throughout 2016, the Long Island office market performed well with strong fundamentals and economic indicators. Amid steady job growth and growing GDP, the Long Island office market should post moderate growth in 2017 and rebound to the equilibrium level. The overall market responded positively following the November election though the actual effects are still in a wait-and-see stage.
Within the Long Island market, Nassau County is outperforming Suffolk Country. Vacancy in Nassau is still falling and at 7.6%, stands 220 BPS below the Suffolk level. Nassau accounted for 89% of total Long Island net absorption in 2016. Q4 2016 Key Indicators | Long Island
Class A Asking Rent (PSF) $30.63 Many full-service law firms are paying near-asking rents in Class A office buildings in order to attract and retain top talent and preserve Downtown Vacancy Rate 8.6% professional working environments. In addition, many firms are encountering limited options for relocation due to low levels of Number of Law Firms in the Market Up availability. However, many are seeking to utilize their spaces more Market Sentiment Landlords’ Favor efficiently, especially as support staffing levels decline as new attorneys perform the majority of clerical and administrative tasks. Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Long Island
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Scully, Scott, Murphy & Presser PC 22,000 400 Garden City Plaza 400 Garden City Plaza Renewal Q4
Picciano & Scahill PC 17,000 1050 Stewart Avenue 1050 Stewart Avenue New Q4
Harris Beach PLLC 14,779 333 Earle Ovington Boulevard 333 Earle Ovington Boulevard Renewal/Expansion Q1
Source: Colliers International LOS ANGELES
While vacancy fell over the past 12 months, the Los Angeles office market is reaching equilibrium with little movement in key indicators in Q4 2016. There is still the possibility of more rent growth in 2017, but we are unlikely to see a repeat of 2016’s pace. Media and entertainment, technology and law firms dominate leasing activity and fashionable locations are in demand.
Downtown Los Angeles scored a major coup with Warner Music’s decision to relocate its headquarters from Burbank to 257,000 square feet in the newly restored Ford Factory building in the downtown Arts Q4 2016 Key Indicators | Los Angeles District. In addition, CIM Group has committed to leasing 242,200 square feet at Two California Plaza in the Bunker Hill submarket. Class A Asking Rent (PSF) $41.40
Downtown Vacancy Rate 18.2% Law firms in Los Angeles are generally renewing or relocating while also downsizing. Like firms in finance and other professional services Number of Law Firms in the Market Static industries, law firms are searching for more efficient space solutions to help offset rising rents and costs. Market Sentiment Landlords’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Los Angeles
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Paul Hastings LLP 140,000 City National Plaza 515 South Flower Street Renewal/Downsize Q1
Quinn Emanuel Urquhart & Sullivan LLP 135,000 865 South Figueroa 865 South Figueroa Street Renewal Q2
Orrick, Herrington & Sutcliffe LLP 65,600 777 Tower 777 South Figueroa Street Renewal Q2
Source: Colliers International
9 North America Report | 2016 Year-End Review & Outlook | Colliers International MANHATTAN
At 33.1 million square feet, Manhattan office leasing activity in 2016 was 5.5% higher year-over-year and was the third-highest annual total seen in the past 10 years. Demand was led by the finance, insurance and real estate (FIRE) sector, which accounted for the largest share of Manhattan leasing in 2016 at 31%.
Asking rents increased to an average of $73.24 per square foot at year- end 2016 — 2.4% higher than at year-end 2015. In 2016, 1.5 million square feet of lease transactions had starting rents above $100 per square foot, and rents in Midtown South and Downtown are at record highs. Q4 2016 Key Indicators | Manhattan
While several of 2016’s largest transactions reflected tenants choosing Class A Asking Rent (PSF) $78.64 to remain in their current spaces, the impact of pending new supply in 2017 could push vacancy up from the 6.4% rate seen in 2016 if Vacancy Rate 6.4% demand does not keep pace. Number of Law Firms in the Market Static
Instead of approaching office space as a cost of doing business, law Market Sentiment Equal Footing firms are rethinking and redesigning their spaces as environments that better serve the needs and expectations of both clients and employees. Source: Colliers International Leading Law Firm Lease Transactions in 2016 | Manhattan
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Milbank, Tweed, Hadley & McCloy LLP 257,567 55 Hudson Yards 55 Hudson Yards New Q3
Dentons 207,371 1221 Avenue of the Americas 1221 Avenue of the Americas Renewal Q3
Hogan Lovells LLP 206,720 390 Madison Avenue 390 Madison Avenue New Q4
Source: Colliers International MILWAUKEE
The metro Milwaukee office market had a strong year in 2016. Vacancy rates continued their downward trend, ending the year at 16.7%. Annual net absorption totaled 638,780 square feet — the highest this cycle. Additionally, rental rates are climbing steadily. In the past year, net rents for the top five downtown assets increased an average of 3.23%, outpacing inflation and resulting in real rental growth.
Trends in 2016 saw tenants gravitating to downtown. The number of companies relocating to downtown increased as firms seek to locate near highly qualified, young professionals who exhibit a preference for Q4 2016 Key Indicators | Milwaukee urban living.
Class A Asking Rent (PSF) $21.58 We are seeing an increase in law firms actively considering their space Downtown Vacancy Rate 12.4% requirements, particularly in the CBD. As space utilization trends have accelerated, more and more law firms are making long-term real estate Number of Law Firms in the Market Up decisions — typically resulting in a 15%–25% reduction in space occupied. Market Sentiment Landlords’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Milwaukee
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Foley & Lardner LLP 197,000 U.S. Bank Center 777 East Wisconsin Avenue Renewal Q3
Habush Habush & Rottier SC 11,935 U.S. Bank Center 777 East Wisconsin Avenue Renewal Q3
Petrie & Pettit SC 6,114 Two-Fifty 250 East Wisconsin Avenue New Q3
Source: Colliers International
10 North America Report | 2016 Year-End Review & Outlook | Colliers International MINNEAPOLIS
Minneapolis-St. Paul remains a strong second-tier U.S. office market with steady job growth since the recession, a highly-educated workforce and a strong corporate presence.
In the Minneapolis CBD, many landlords are renovating their properties to appeal to amenity-conscious potential tenants and to provide in-demand creative spaces. After implementing these upgrades, the recently renovated Washington Square leased 150,000 square feet in recent quarters. Additional properties undergoing remodeling include the Baker Block, TCF Building and Fifth Street Towers. Q4 2016 Key Indicators | Minneapolis The majority of the larger law firms in Minnesota are located in the Minneapolis CBD. Many are in long-term leases while a number have Class A Asking Rent (PSF) $18.23 gone from multiple offices to one or two offices while reducing the 15.4% square footage per attorney. Downtown Vacancy Rate Number of Law Firms in the Market Down
Market Sentiment Equal Footing
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Minneapolis
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Stinson Leonard Street LLP 105,000 50 South Sixth 50 South 6th Street New Q3
Lindquist & Vennum LLP 84,843 IDS Center 80 South 8th Street Renewal Q1
Bassford Remele 34,845 Fifth Street Towers 100 South 5th Street New Q4
Source: Colliers International NASHVILLE
Employment remains strong in Nashville with a 3% year-over-year job growth rate in 2016. Nashville has transitioned to an upper-tier secondary market, and economic indicators favor Music City’s office market in 2017. Nashville’s office market remains among the nation’s most active, and the health care, legal and corporate operations sectors helped fuel this momentum throughout 2016.
Downtown Nashville was a top-performing submarket in 2016, as multiple tenants chose to relocate or expand into new space in various high-profile office towers. Downtown ended Q4 2016 with a Class A Q4 2016 Key Indicators | Nashville vacancy rate of 6.4%, down 2.6 percentage points from Q3 2016 and Class A Asking Rent (PSF) $29.63 marking the largest vacancy drop over that time period for any market surveyed. Downtown Vacancy Rate 7.0% Law firms in Nashville have been relocating and upgrading to space in Number of Law Firms in the Market Up newly delivered buildings over the past few years. New construction Market Sentiment Landlords’ Favor has attracted many top law firms, which has driven up rental rates in the buildings being vacated by these firms. Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Nashville
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Burr & Forman LLP 26,450 222 222 2nd Avenue New Q3
Dickinson Wright PLLC 22,085 Fifth Third Center 424 Church Street Renewal Q4
Manier & Herod 15,369 1201 1201 Demonbreun Street New Q3
Source: Colliers International
11 North America Report | 2016 Year-End Review & Outlook | Colliers International NORTHERN NEW JERSEY
Northern New Jersey ended 2016 with positive momentum as continuing economic strength drove most of the office market forward. Nine of the 13 Northern New Jersey submarkets recorded positive absorption in Q4 2016, and overall availability remained unchanged at 21%.
The Parsippany submarket has benefited from an increase in tenant activity and the growing trend toward adaptive re-use. At 28.4%, the submarket’s availability rate has reached its lowest point since Q1 2011. One driver for this improvement is the planned redevelopment of 1515 Route 10 into The District at 1515, a vibrant mixed-use retail/residential Q4 2016 Key Indicators | Northern New Jersey town center. The average asking rent in the submarket increased 3.4% quarter-over-quarter to $26.58 per square foot in Q4 2016. The removal Class A Asking Rent (PSF) $29.58 of lower-priced space from the market contributed to this increase. Downtown Vacancy Rate 16.9% There has been a recent trend in Northern New Jersey of practice Number of Law Firms in the Market Static groups or attorneys leaving larger firms to start their own firms. We have also seen a “flight to quality” among some of the larger, Market Sentiment Tenants’ Favor more established law firms due to the recent refurbishment and modernization of office buildings in the state. Source: Colliers International Leading Law Firm Lease Transactions in 2016 | Northern New Jersey
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Connell Foley LLP 75,000 56 at Roseland 56 Livingston Avenue New Q4
Seeger Weiss LLP 42,145 55 Challenger Road 55 Challenger Road New Q4
Pashman Stein Walder Hayden PC 27,500 Court Plaza 21 Main Street Renewal/Expansion Q4
Source: Colliers International PHILADELPHIA
After increasing in early 2016, the downtown Philadelphia office vacancy rate decreased in the latter half of the year to 9.6%. The strengthening market has pushed lease negotiations in favor of landlords. Rents increased during the second half of 2016, while concessions tightened. Landlords are offsetting rising construction costs for tenant improvements by requiring longer terms.
The outlook for 2017 is for a continued drop in vacancy. The delivery of renovated space at One Franklin Tower may increase vacancy during Q2 2017. PMC Property Group and Lubert-Adler Real Estate will commence Q4 2016 Key Indicators | Philadelphia on the renovation of 2400 Market Street after landing Aramark as the Class A Asking Rent (PSF) $30.57 lead tenant for the nine-story project. Oliver Tyrone Pulver is proposing an 840,000-square-foot tower at 1301 Market Street. Downtown Vacancy Rate 9.6% Many law firms, particularly AMLaw 200 firms, are continuing to Number of Law Firms in the Market Down contract their office footprints. Driving their efforts are new office Market Sentiment Landlords’ Favor standards, reduced attorney-to-support ratios and the use of technology to replace long-standing features like law libraries and high- Source: Colliers International density file storage.
Leading Law Firm Lease Transactions in 2016 | Philadelphia
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Duane Morris LLP 248,616 United Plaza 30 South 17th Street Renewal Q3
Montgomery McCracken Walker & Rhoads LLP 75,000 BNY Mellon Center 1735 Market Street New Q4
Hogan Lovells US LLP 34,752 BNY Mellon Center 1735 Market Street New Q4
Source: Colliers International
12 North America Report | 2016 Year-End Review & Outlook | Colliers International SAN DIEGO
Positive net absorption of 1.7 million square feet of office space in San Diego County in 2016 pushed demand to its strongest level since 2005. Average asking rental rates countywide in Q4 2016 reached the highest levels in eight years.
Several trends are being driven in part by the growing millennial population that lives-works-plays in downtown San Diego and the surrounding communities. Many work in the tech industries, which are increasingly utilizing flexible work environments and cooperative or shared work spaces. While many suburban submarkets will continue to attract similar tenants, the pace of demand downtown should continue to accelerate. Both downtown and suburban submarkets are expected Q4 2016 Key Indicators | San Diego to see vacancies decrease while rental rates rise across all classes Class A Asking Rent (PSF) $35.76 in 2017. Downtown Vacancy Rate 14.7% In the two largest law firm transactions in 2016, Jones Day and Number of Law Firms in the Market Static Dentons both relocated to a new Class A building providing an opportunity to consolidate and create more efficient layouts. Many law Market Sentiment Landlords’ Favor firms are exploring relocating but after analyzing overall costs, most have recently been renewing in place. Source: Colliers International Leading Law Firm Lease Transactions in 2016 | San Diego
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Jones Day 62,600 One La Jolla Center 4655 Executive Drive New Q1
Dentons 46,000 One La Jolla Center 4655 Executive Drive New Q1
Bernstein Litowitz Berger & Grossmann LLP 22,000 High Bluff Ridge 12481 High Bluff Drive Renewal Q1
Source: Colliers International SAN FRANCISCO
The core San Francisco Bay Area market remains one of the tightest across the top 10 U.S. office markets. Office vacancy fell by 20 BPS in Q4 2016 to 6.6%. Average asking rents in Q4 2016 reached $72.46 per square foot, less than a dollar below those in Manhattan. While below the 10-year average, net absorption remains solid and dominated by tech.
Signs point to a decrease in leasing activity in 2017. Development opportunities are becoming scarcer, and office-using job growth is forecasted to fall to 1.5% this year — less than half the expected 2016 level. Only three deliveries above 100,000 square feet are anticipated Q4 2016 Key Indicators | San Francisco in 2017. By far, the largest of these is the 1.4-million-square-foot Class A Asking Rent (PSF) $74.62 Salesforce Tower, which is 60% pre-leased.
Downtown Vacancy Rate 6.6% The law firm landscape remains relatively quiet in San Francisco as many firms have either renewed in place (often reconfiguring and Down Number of Law Firms in the Market reducing space) or relocated and right-sized within second-generation Market Sentiment Landlords’ Favor spaces. As the next wave of new product begins to hit the market at the end of 2017, there may be opportunities for law firms with 2018 Source: Colliers International and 2019 lease expirations, should the market begin to soften. Leading Law Firm Lease Transactions in 2016 | San Francisco
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Paul Hastings LLP 40,422 101 California 101 California Street New Q2
Manatt, Phelps & Phillips LLP 35,912 One Embarcadero Center 1 Embarcadero Center New Q3
Polsinelli PC 26,245 Three Embarcadero Center 3 Embarcadero Center New Q1
Source: Colliers International
13 North America Report | 2016 Year-End Review & Outlook | Colliers International SOUTH FLORIDA
The office market in Miami-Dade County was stable in 2016 as office vacancy fell and net absorption rose.
While there was some softening in rent growth in the second half of 2016, Broward County remains a robust and stable market. 2016 was one of the strongest years for net absorption, with absorption levels pushing over 1 million square feet and driving vacancy rates down by 140 BPS year-over-year. Absorption has been heightened by limited new development in Broward County, which allowed the market to strengthen. Q4 2016 Key Indicators | South Florida As we continue to move toward the peak of the current real estate cycle in South Florida, law firms are seeking to lower their occupancy Class A Asking Rent (PSF) $41.24 costs and increase their efficiencies. Downtown Vacancy Rate 11.5%
Number of Law Firms in the Market Up
Market Sentiment Landlords’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | South Florida
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Akerman LLP 110,508 Three Brickell City Centre 98 Southeast 7th Street New Q4
Cole, Scott & Kissane, P.A. 59,210 Dadeland Centre II 9150 South Dadeland Boulevard Renewal/Expansion Q4
The Law Offices of Kanner & Pintaluga P.A. 56,775 Wells Fargo Plaza 925 South Federal Highway Renewal/Expansion Q2
Source: Colliers International TORONTO
The overall vacancy rate for the Greater Toronto Area (GTA) office market increased slightly from the previous quarter to 5.4% in Q4 2016. Throughout 2016, GTA office properties not only experienced an increase in asking rental rates but also in operating costs. The increases in additional costs were the highest in certain GTA West submarkets and the fringe downtown submarkets.
More than 2.6 million square feet of office space were delivered to the GTA market in 2016 — the highest level since 2010. The share of Q4 2016 Key Indicators | Toronto new supply in 2016 was split almost evenly between the downtown (51%) and suburban markets (49%) and most of the new supply Class A Asking Rent (PSF) $21.86* was absorbed. New supply will likely continue to shape the market in Downtown Vacancy Rate 6.3% 2017 as more than 2 million square feet of space are currently under construction, with much more in the planning stages. Number of Law Firms in the Market Down Legacy tenants in the GTA market within the finance, legal and Market Sentiment Landlords’ Favor professional services industries are generally not expanding. However, technology, advertising, media and information (TAMI) tenants are *Converted to USD Source: Colliers International expanding and currently driving the market.
Leading Law Firm Lease Transactions in 2016 | Toronto
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Aird & Berlis LLP 116,000 Brookfield Place 181 Bay Street Renewal Q2
McMillan LLP 110,000 Brookfield Place 181 Bay Street Renewal Q2
Baker McKenzie LLP 50,000 Brookfield Place 181 Bay Street Renewal Q3
Source: Colliers International
14 North America Report | 2016 Year-End Review & Outlook | Colliers International VANCOUVER
Metro Vancouver vacancy rates were down from 9.3% in Q3 2016 to 7.9% in Q4 2016. A lack of new supply entering the market at the end of 2016 contributed to the downward vacancy trend. Most submarkets also saw positive absorption in Q4 2016.
Downtown vacancy rates declined to 6% in Q4 2016, down from 6.9% in Q3 2016. The greatest drop came from AAA office space, where vacancy rates dropped from 7.3% in Q3 2016 to 4.2% in Q4 2016.
There is almost 1.3 million square feet of office space expected to Q4 2016 Key Indicators | Vancouver deliver in 2017 and 42% is pre-leased. The 510 Seymour office building will be ready for occupancy in Q1 2017 and is already 88% leased. 475 Class A Asking Rent (PSF) $22.46* Howe is expected to complete in Q3 2017 and had 90% vacancy at year-end 2016. Downtown Vacancy Rate 6.0% Number of Law Firms in the Market Static Vancouver has seen a handful of new buildings delivered over the past few years that have given law firms an opportunity to redefine how Market Sentiment Landlords’ Favor they work. Two recent examples are McCarthy Tetrault LLP and Miller Thomson LLP, who have taken progressive leaps forward in office design. *Converted to USD Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Vancouver
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Gowling WLG 43,413 Bentall 5 550 Burrard Street Renewal Q3
Guild Yule LLP 20,049 1075 West Georgia 1075 West Georgia Street Renewal Q2
Source: Colliers International
WASHINGTON, D.C.
The downtown Washington, D.C. office market is softening. Net absorption across the District was slightly negative in 2016, with the East End taking the biggest hit. Average rents held steady over 2016 but the volume of trophy space under construction in the CBD and East End will likely add downward pressure. Asking rents of up to $60 per square foot are being quoted for top-end new construction but expect contract rents to decline from these heady levels once concessions and tenant improvements are factored in.
Most law firms that have a near-term lease expiry are considering their Q4 2016 Key Indicators | Washington, D.C. options, but a significant share would rather stay put and reduce their Class A Asking Rent (PSF) $57.82 footprints. Washington, D.C. saw four new law firm leases in 2016, all of which were relocations. Most firms will continue to reduce square Downtown Vacancy Rate 10.9% footage — the question is by how much.
Number of Law Firms in the Market Static
Market Sentiment Tenants’ Favor
Source: Colliers International
Leading Law Firm Lease Transactions in 2016 | Washington, D.C.
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Cleary Gottlieb Steen Hamilton LLP 114,500 2112 Penn 2112 Pennsylvania Avenue Northwest New Lease Q1
Paul Hastings LLP 97,000 2050 M Street 2050 M Street Northwest New Lease Q4
Weil Gotshal & Manges LLP 65,000 2001 M Street 2001 M Street Northwest New Lease Q4
Source: Colliers International
15 North America Report | 2016 Year-End Review & Outlook | Colliers International WESTCHESTER COUNTY, NY
Vacancy in the Westchester County office market rose from 15.2% to 16.9% in 2016. Average asking rents declined slightly from $27.54 per square foot to $26.96 per square foot over the past year. Despite more than 500,000 square feet of leasing activity over the past year, vacancy in the White Plains CBD rose from 13.1% to 16.6% in 2016 — just below the overall county level. Although slightly down from a year ago, average asking rents in White Plains remain the highest in the county at $30.51 per square foot.
Westchester experienced an increase in law firm leasing activity and Q4 2016 Key Indicators | Westchester County* expansions over the past 18 months. Key law firm transactions during this period include Wilson Eisner, which expanded to 127,000 square Class A Asking Rent (PSF) $30.51 feet at 1133 Westchester Avenue, and Jackson Lewis’ expansion to Downtown Vacancy Rate 16.6% 27,000 square feet.
Number of Law Firms in the Market Up
Market Sentiment Equal Footing
*White Plains Source: Colliers International Leading Law Firm Lease Transactions in 2016 | Westchester County
LAW FIRM SF LEASED PROPERTY NAME ADDRESS NEW LEASE OR RENEWAL QUARTER
Traub Lieberman Straus & Shrewsberry LLP 28,007 Mid-Westchester Executive Park 7 Skyline Drive Renewal Q1
DelBello Donnellan Weingarten Wise & Wiederkehr LLP 27,559 1 North Lexington Avenue 1 North Lexington Avenue Renewal Q1
Cuddy & Feder LLP 26,365 445 Hamilton Avenue 445 Hamilton Avenue Renewal Q2
Source: Colliers International
LAW FIRM SERVICES GROUP CONTACTS RESEARCH CONTACT DANIEL ARENDS STEPHEN NEWBOLD Principal, National Director, Office Advisory Group Office Research | USA +1 312 612 5908 +1 202 534 3630 [email protected] [email protected]
COLIN SCARLETT Executive Vice President, Personal Real Estate Corporation +1 604 661 0879 [email protected]
Copyright © 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While colliers.com/us/law every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.