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2017 Law Firm office market overview

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Vacancy at the top of the market is slowly moving upward, although levels remain below historic norms. New supply and givebacks upon relocation due to efficiency have begun to and will continue to result in rising vacancy.

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2017 Law Firm office market overview

  1. 1. 2017 Law firm market overview October 2017
  2. 2. 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.
  3. 3. 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
  4. 4. Brexit-related business slowdown and supply influx are placing London counter to continental markets Source: JLL Research 4 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
  5. 5. Vacancy to rise incrementally across Asia apart from Singapore, while Sydney will register rapid rent growth Source: JLL Research 5 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
  6. 6. 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 Source: JLL Research 6
  7. 7. 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-month%change 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%
  8. 8. $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 $100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Grossrevenue($billions)Gross revenue grew by 4.3% in 2016 to $86.7 billion, 1.6x faster than in 2015 8Source: JLL Research, American Lawyer
  9. 9. $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 $920,000 2010 2011 2012 2013 2014 2015 2016 Revenueperlawyer($)Revenue per lawyer growth slowed in 2016 (+1.5%) due to an uptick in hiring 9Source: JLL Research, American Lawyer
  10. 10. $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 $1,700,000 2010 2011 2012 2013 2014 2015 2016 Revenueperlawyer($)Profits per partner rose by 3% in 2016, slower than in 2015 but still at a steady rate 10Source: JLL Research, American Lawyer
  11. 11. 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 NumberofmergersAs of mid-year, M&A well on track to surpass previous highs set in 2013 and 2015 11Source: JLL Research, American Lawyer
  12. 12. -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2010 2011 2012 2013 2014 2015 2016 2017 Rentgrowthsince2010(%)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
  13. 13. $30 $35 $40 $45 $50 $55 10% 11% 12% 13% 14% 15% 16% 17% 2010 2011 2012 2013 2014 2015 2016 2017 CBDClassAaskingrent($p.s.f.) CBDClassAtotalvacancy(%) 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 13Source: JLL Research
  14. 14. -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) San Francisco Philadelphia New York (Midtown) New York (Downtown) Dallas Chicago Los Angeles (Century City) AnnualCBDClassArentgrowth(%)U.S.: Century City continues to see fastest rent growth of any legal services hub, with no tenant relief expected 14Source: JLL Research
  15. 15. $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 $65 2012 2013 2014 2015 2016 2017 Freemonths Tenantimprovementallowance($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
  16. 16. 24,058,160 12,977,792 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 CBDClassAsubleasevacancy(s.f.)U.S.: Although nearing 13 m.s.f., sublease vacancy is still half of its recessionary high 16Source: JLL Research
  17. 17. 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 2,036,955 1,050,000 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) CBDClassAcompletions(s.f.)U.S.: 65 m.s.f. of new supply will deliver this cycle, significantly shifting the market in favor of firms Source: JLL Research 17 65.0 m.s.f. 2017-2021 completions
  18. 18. 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
  19. 19. U.S.: Vacancy in law firm-heavy submarkets continues to fall, pushing up rents dramatically Source: JLL Research 19 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
  20. 20. 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 A B 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.)
  21. 21. Washington, DC: Class A vacancy will rise to 20% as new supply floods the market and large tenant demand remains limited until 2020 Source: JLL Research 21 $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
  22. 22. 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 2014 2015 2016 2017 (YTD) ClassAtotalvacancy(%) West Loop Central Loop East Loop Chicago: traditional law firm submarkets to become even more tenant-friendly as vacancy spikes Source: JLL Research 22 150 N Riverside and River Point causing rising vacancy
  23. 23. $54.12 $55.56 $59.40 $65.64 $50 $52 $54 $56 $58 $60 $62 $64 $66 $68 2014 2015 2016 2017 (YTD) ClassACenturyCityaskingrents($p.s.f.)Los Angeles: dwindling large blocks have caused rents to surge at double-digit rates Source: JLL Research 23 $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.)
  24. 24. $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 $78 2014 2015 2016 2017 (YTD) ClassAaskingrents($p.s.f.) North Financial District South Financial District San Francisco: after years of rapid acceleration, rents have stabilized within the CBD Source: JLL Research 24
  25. 25. John Sikaitis John.Sikaitis@am.jll.com +1 202 719 5838 Phil Ryan Phil.Ryan@am.jll.com +1 212 292 8040 http://www.us.jll.com/united-states/en-us/research/industry/law-firms

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