More Law Firms Opt to Relocate Instead of Renewing

The number of law firms choosing to relocate their offices instead of renew existing leases is growing, and amenities have become a critical factor in relocation decisions, Colliers concluded in its 2024 spotlight report on North American law firm practice groups.

“Law firms seek buildings that provide modern, efficient workspaces,” Colliers stated, noting that firms are hunting for universal office designs that enable both privacy and collaboration. “These designs are more easily implemented in newer buildings with flexible floor plates and modern infrastructure supporting the latest technological needs. Relocations can be opportunities to rebrand the firm’s physical presence in line with contemporary standards, portraying a forward-thinking, adaptive culture.”

Underlying this effort is the belief that a high-quality work environment can help attract top talent, encourage staff productivity and well-being, and enhance a firm’s prestige. This is happening even as “the slow and deliberate return-to-office pace appears to be moderating.”

Even though many tenants require employees to work in office at least three days a week, a tight labor market favors workers, and significant cultural shifts are occurring. These shifts are affecting office design, space utilization, and employee expectations. Law firms are also demanding more flexible lease agreements, including new termination options.

All this is happening as the U.S. office market has recorded over 245 million SF of negative absorption since the pandemic, more than double the negative 93 million SF during the Global Financial Crisis (GFC), Colliers noted. It predicted the trend will continue “firmly in the red” for 2024.

“At the start of 2024, the U.S. office vacancy rate climbed to 17.5%, 40 basis points higher than in Q4 2023. Absorption is expected to remain firmly in the red for 2024…The trend of structural vacancy could intensify as evolving demands and higher ESG standards render many older buildings functionally obsolete.”

In addition, spaces with state-of-the-art amenities will command a premium, especially as new developments dry up. Even though demand for Class A facilities remained strong, projects under construction fell 55% because of higher construction and financing costs and interest rate uncertainty.

Law firms are also demanding more flexible lease agreements, including new termination options. Nevertheless, 86% plan to sign long-term leases of 10 years or more. At the same time, Colliers noted, overall, most occupiers are cutting space by 20% to 30%. It found that 56.5% of law firms that are relocating intend to reduce their square footage, 34.5% intend to maintain it, and 9% will increase their space.

In spite of all these challenges, Colliers found that gross asking rents have generally continued to rise, with the average for the 20 markets it covers at $44.83 – 5.1% more than in its previous report. The flight to quality at the expense of Class B and C buildings has encouraged higher rents for Class A properties.

Meanwhile, Class A vacancy rates rose in the same markets throughout 2023 and into 1Q 2024, driven by higher taxes and operating expenses. The gap between suburban Class A and CBD vacancy rates narrowed, with suburban rates up 60 bps to 20.4% and CBD rates up 20 bps to 19.5%.

But even though landlords are raising asking rents for law firms, they are also being pushed into increasing tenant improvement (TI) allowances, expanding the gap between asking and effective rents. On a national basis, the survey showed an average tenant allowance of $122 per SF and 10 ½ months of free rent. In the West, the average TI allowance was $155 per SF, with 9.1 months of free rent. For the Northeast, it was $140 per SF and 13.2 months of free rent. In the South, the figures were $104 and 10 months, and in the Midwest $92 and 10 months. In Gateway markets, the average was $148 and 13.4 months, in large markets $96 and nine months, and in medium markets $130 and 10.5 months.

Among cities, the highest rent for Class A law firm space was in Manhattan where average asking rent was $80.43/SF with a TI of $150 and 14 months of rent abatement. San Francisco came second, with $77.27 asking rent, a TI of $200 and 12 months of free rent. In Austin, asking rent stood at $60.53 with a TI of $125 and eight months free rent. In Washington, DC, asking rent stood at $59.07 with a TI of $150 and 18-20 months free rent.

“The significant increase in TI allowances requires law firms to explore various financing options, potentially impacting financial health and operational flexibility,” Colliers noted. “Concurrently, landlords’ scrutiny of firms’ financial stability complicates lease negotiations, compelling firms to secure leases with protections against market volatility and unforeseen financial challenges.”