2017 law firm office market overview

2017

Law firm market

overview

October 2017

Global city office markets are preparing to enter a new phase characterized by greater leverage for firms

Source: JLL Research 2

Tight conditions to ease

Vacancy at the top of the market is slowly

moving upward, although levels remain

below historic norms. New supply and give-

backs upon relocation due to efficiency

have begun to and will continue to result in

rising vacancy.

Rent growth beginning to slow

Rapid rent growth has challenged firms,

particularly in Sydney and San Francisco.

Changing supply-and-demand dynamics

will result in rents stabilizing in 2018 and

even dropping in supply-heavy markets

such as London, New York, Chicago and

DC.

Concessions trending upward

Landlords in top legal services markets

have increased tenant improvement

allowances by 34%. Concessions will rise

even more as new space delivers.

Most large legal markets globally are peaking, indicating slowing rent growth and impending new supply

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 3

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Beijing, Washington, DC

Chicago, New York

Atlanta, Boston, Philadelphia

Los Angeles, Toronto

Hong Kong, San Francisco, Tokyo

Dallas, Munich, Seattle

Frankfurt

Paris, Sydney

Miami

Singapore

Houston

London

Shanghai

Brexit-related business slowdown and supply influx are placing London counter to continental markets


London (City)

4.3 m.s.f. will deliver beginning in 2018, while prime rents have

stalled at £70 p.s.f. Core City assets are more susceptible to rent

declines than those in fringe submarkets, benefitting firms.

Frankfurt

Rents have begun to flatten out, but will likely see further

increase by the end of 2017. The market is preparing for

inbound demand due to relocations from London.

2017 2018 2019

2017 2018 2019

Paris

Although growth has cooled somewhat, activity remains dynamic.

Vacancy has dropped to a potentially cyclical low of 3.5% in the

CBD, which will translate into upward pressure on rents.

Munich

Robust occupier activity in was well above medium and long term

averages. Vacancy has narrowed down to 4.2% and is likely to

decline further. Rents are likely to trend upward in the short term.

2017 2018 2019

2017 2018 2019

Landlord-favorable Neutral Tenant-favorable

Vacancy to rise incrementally across Asia apart from Singapore, while Sydney will register rapid rent growth


Beijing

Although new supply expected in the CBD will cause downward

pressure on rents, completions will be staggered over several

years.

Tokyo

Vacancy rose for the third consecutive quarter to 2.9% and is

expected to increase further as a wave of new construction

delivers gradually over the next three years.

Shanghai

Both the CBD and the decentralized market are expecting

further deliveries through year-end. The market will need time

to absorb new supply.

Hong Kong

Central rents jumped by 8.3% over the year to $178.80 p.s.f.,

surpassing their record highs set in 2008. Tenants will be

challenged by a lack of new supply in Central.

Singapore

Rents are expected to pick up moderately over the next few

quarters as the leasing market improves. Rents in 2019 and

2020 could expand in further on the back of limited new supply.

Sydney

Supply withdrawals due to residential conversion and

acquisition for new infrastructure will exacerbate constraints

and keep rent growth at or near the top of all global markets.

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

2017 2018 2019

Landlord-favorable Neutral Tenant-favorable

49,990

156,326

388,449

417,704

603,970

2,604,891

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

City Southern

City Midtown

City Western

City Central

City Northern

City Eastern

Under construction (s.f.)

London: firms will find the most opportunity for moving to new supply in City Eastern


U.S. legal services employment growth remains below that of the broader economy amid talent challenges from tech

Source: JLL Research, Bureau of Labor Statistics 7

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

12-m

onth

% c

han

ge

Legal services Total non-farm Tech

+1.4%Total non-farm

+0.4%Legal services

12-month % change

+3.5%Tech

Since 2010, US law firm admissions are down nearly 25% while

tech employment is up nearly 55%

$31.1

$35.1$38.1

$41.7

$46.0

$50.9

$56.8

$64.5$67.3

$64.4$67.4

$71.4$73.4

$77.4

$80.9$83.1

$86.7

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Gro

ss r

eve

nu

e (

$ b

illio

ns)

Gross revenue grew by 4.3% in 2016 to $86.7 billion, 1.6x faster than in 2015

8Source: JLL Research, American Lawyer

$804,651

$820,235

$842,130$838,775

$871,002

$894,253

$907,765

$740,000

$760,000

$780,000

$800,000

$820,000

$840,000

$860,000

$880,000

$900,000

$920,000

2010 2011 2012 2013 2014 2015 2016

Re

ve

nu

e p

er

law

ye

r ($

)Revenue per lawyer growth slowed in 2016 (+1.5%) due to an uptick in hiring


$1,375,747

$1,402,392

$1,463,875 $1,466,809

$1,548,901

$1,613,439

$1,661,772

$1,000,000

$1,100,000

$1,200,000

$1,300,000

$1,400,000

$1,500,000

$1,600,000

$1,700,000

2010 2011 2012 2013 2014 2015 2016

Re

ve

nu

e p

er

law

ye

r ($

)Profits per partner rose by 3% in 2016, slower than in 2015 but still at a steady rate


60

70

53

39

60 60

88

82

91

85

52

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD 2017

Nu

mb

er

of m

erg

ers

As of mid-year, M&A well on track to surpass previous highs set in 2013 and 2015


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014 2015 2016 2017

Re

nt g

row

th s

ince 2

01

0 (

%)

Rents for quality space in urban cores continue to register growth double that of the overall market

12Source: JLL Research

+35.7%CBD Class A

+17.7%U.S. overall

$30

$35

$40

$45

$50

$55

10%

11%

12%

13%

14%

15%

16%

17%

2010 2011 2012 2013 2014 2015 2016 2017

CB

D C

lass A

askin

g r

ent ($

p.s

.f.)

CB

D C

lass A

to

tal va

can

cy (

%)

Total vacancy Asking rent

U.S.: An increasing rate of top-quality new supply has resulted in slowly rising vacancy as well as rent growth


-1.6% -1.5%

0.2% 0.4%0.9%

1.3%

3.8%

7.0%7.4%

9.3%

11.9%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Houston Washington,DC

Boston Los Angeles(Downtown)

SanFrancisco

Philadelphia New York(Midtown)

New York(Downtown)

Dallas Chicago Los Angeles(Century City)

An

nu

al C

BD

Cla

ss A

re

nt g

row

th (

%)

U.S.: Century City continues to see fastest rent growth of any legal services hub, with no tenant relief expected


$41.17 $40.85$39.54

$43.74

$52.21

$62.26

4.5

5.0

5.5

6.0

6.5

7.0

7.5

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

2012 2013 2014 2015 2016 2017

Fre

e m

onth

s

Te

na

nt im

pro

ve

me

nt a

llow

ance

($

p.s

.f.)

TI allowance Free months

U.S.: Concessions for new space will continue upward trend as deliveries and competition for tenants increase

Soruce: JLL Research 15

24

,05

8,1

60

12

,97

7,7

92

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2010 2011 2012 2013 2014 2015 2016 2017

CB

D C

lass A

su

ble

ase

va

can

cy (

s.f

.)U.S.: Although nearing 13 m.s.f., sublease vacancy is still half of its recessionary high


13,945,656

6,004,317

2,652,375

8,249,314 7,867,945

10,485,664

15,645,213

20,598,708

26,470,609

14,843,902

2,036,9551,050,000

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2010 2011 2012 2013 2014 2015 2016 2017 (F) 2018 (F) 2019 (F) 2020 (F) 2021 (F)

CBD

Clas

s A

com

plet

ions

(s.f.

)U.S.: 65 m.s.f. of new supply will deliver this cycle, significantly shifting the market in favor of firms


65.0 m.s.f.2017-2021 completions

974

759

623

1,050

881

663

Historic Current Future

Overall Legal hubs

U.S.: Improved efficiency and relocation to new space, could yield 24% reductions in costs in top markets

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. 18

Square feet per attorney

$38,261

$33,620

$27,392

$58,333

$46,633

$35,233

Historic Current Future

Overall Legal hubs

Rent per attorney

U.S.: Vacancy in law firm-heavy submarkets continues to fall, pushing up rents dramatically


12.5%

(-370bp)

CBD Class A vacancy

decrease since 2010

$52.19 p.s.f.

(+35.7%)

CBD Class A asking rent

Growth since 2010

New York: 1.1 m.s.f. in law firm relocations to the West Side will open up significant opportunity in Midtown

Source: JLL Research – law firm leasing activity > 25,000 s.f. since Q1 2016 20

AB

55 Hudson Yards 1 Manhattan West

A B

Milbank (257,557 s.f.)

Cooley (131,000 s.f.)

Boies Schiller (83,292 s.f.)

Skadden (550,000 s.f.)

McKool Smith (64,120 s.f.)

Washington, DC: Class A vacancy will rise to 20% as new supply floods the market and large tenant demand remains limited until 2020


$66

$68 $67

$71 $72

$70$69

$68 $68

12%11%

13%14%

15%

16%

19%

20%

21%

$50

$53

$56

$59

$62

$65

$68

$71

$74

$77

$80

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

2013 2014 2015 2016 2017 2018 2019 2020 2021

Asking rent Vacancy

Projected

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

2014 2015 2016 2017 (YTD)

Clas

s A

tota

l vac

ancy

(%)

West Loop Central Loop East Loop

Chicago: traditional law firm submarkets to become even more tenant-friendly as vacancy spikes


150 N Riverside and River Point causing rising vacancy

$54.12

$55.56

$59.40

$65.64

$50

$52

$54

$56

$58

$60

$62

$64

$66

$68

2014 2015 2016 2017 (YTD)

Clas

s A

Cent

ury

City

ask

ing

rent

s ($

p.s

.f.)

Los Angeles: dwindling large blocks have caused rents to surge at double-digit rates


$54.42

$64.78

$65.59

$67.83

$69.34

$0 $20 $40 $60 $80

Westwood

Beverly Hills

Century City

Playa Vista

Santa Monica

Class A asking rent ($ p.s.f.)

$64.40

$70.76

$74.23 $74.41

$65.47

$68.50

$75.56 $75.79

$60

$62

$64

$66

$68

$70

$72

$74

$76

$78

2014 2015 2016 2017 (YTD)

Cla

ss A

askin

g r

en

ts (

$ p

.s.f

.)

North Financial District South Financial District

San Francisco: after years of rapid acceleration, rents have stabilized within the CBD


John Sikaitis

[email protected]

+1 202 719 5838

Phil Ryan

[email protected]

+1 212 292 8040

http://www.us.jll.com/united-states/en-us/research/industry/law-firms