Law Firm Perspective Global 2012

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Conditions remain highly variable within the real estate markets at
the core of global law firm portfolios. A number of markets are seeing
diminishing availability of high quality space options, while others
present good opportunities for law firms to enhance their position.
As clouds remain on the macroeconomic horizon, and caution persists,
law firms will need to adopt a forensic approach to the management of
their real estate portfolio. This will ensure that assets are optimised and
that firms outperform their direct competitors.
Opportunism will be evident in some real estate markets as law
firms react to the changing environment. The traditional focus on
prime locations and trophy buildings will remain, but it will also be
accompanied by a new emphasis on workplace productivity and
space efficiency.

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Law Firm Perspective Global 2012

  1. 1. Law Firm PerspectiveGlobal 2012Preparing for growthConditions remain highly variable within the real estate markets atthe core of global law firm portfolios. A number of markets are seeingdiminishing availability of high quality space options, while otherspresent good opportunities for law firms to enhance their position.As clouds remain on the macroeconomic horizon, and caution persists,law firms will need to adopt a forensic approach to the management oftheir real estate portfolio. This will ensure that assets are optimised andthat firms outperform their direct competitors.Opportunism will be evident in some real estate markets as lawfirms react to the changing environment. The traditional focus onprime locations and trophy buildings will remain, but it will also beaccompanied by a new emphasis on workplace productivity andspace efficiency.
  2. 2. With pressure on firms to improve the efficiency and utilisation of their office space, and a growing number of firms exploring more open plan workplaces with a less cellular structure, many law firms are finding that today’s demands are testing... their existing buildings.
  3. 3. Jones Lang LaSalle Law Firm Perspective • Global • 2012 3
  4. 4. 4 Law Firm Perspective • Global • 2012 Jones Lang LaSalleJones Lang LaSalle Law Firm GroupIn the challenging economic environment we live in today, those occupancy services to our law firm clients, nationally and globally. Thewho are tasked with management responsibility for global, national team understands the importance of providing timely, accurate andor regional law firms increasingly find themselves in the real estate relevant market information to our clients to enable them to efficientlybusiness as a matter of sound firm management. The amount of time manage their real estate in such a way as to generate maximumrequired to deal with portfolios in multiple offices in different cities and/ productivity while mitigating cost.or countries has increased, and has become ever more complex withcritical events arising on a regular basis. These events are nearly Accordingly, we are proud to present the latest version of our globalalways contextual; accordingly, they require a deep understanding of market perspective. This annual report provides information on 30+local market conditions for proper evaluation and action. major markets across the Americas, Asia Pacific and Europe, the Middle East and Africa. The report details market trends for law firmsWith over 1,000 offices in 70 countries worldwide, Jones Lang LaSalle around the globe, with the goal of assisting you and your firm inhas the scope and platform to have a robust firm understanding of navigating the increasingly complex global marketplace.those issues and events. We trust you will find this information useful and solicit your feedback ifThe Jones Lang LaSalle Law Firm Group concentrates on developing there are areas, that you would like to see expanded in the future.occupancy strategies, executing transactions and providing related
  5. 5. Jones Lang LaSalle Law Firm Perspective • Global • 2012 5In this reportJones Lang LaSalle Law Firm Group 4 Melbourne 28In this report 5 Shanghai 29Global overview 6 Singapore 30Law firm market map 8 Sydney 31Global office property clock 9 Tokyo 32Americas 10 EMEA 33 Atlanta 11 Amsterdam 34 Boston 12 Brussels 35 Chicago 13 Dubai Abu Dhabi 36 Dallas 14 Germany 37 Houston 15 London City 39 Los Angeles 16 Madrid 40 Miami 17 Milan 41 New York 18 Moscow 42 Philadelphia 19 Paris 43 San Francisco 20 Warsaw 44 Washington, DC 21 Contacts 45 Montréal 22 Toronto 23 Vancouver 24Asia Pacific 25 Beijing 26 Hong Kong 27
  6. 6. 6 Law Firm Perspective • Global • 2012 Jones Lang LaSalleLaw Firm Global PerspectiveLaw firms continue to face a tough global operating environment, with become increasingly critical growth drivers for all business sectors -macroeconomic pressures and uncertainty bearing down on many including law firms.of the business sectors they serve. After a period of internationalexpansion and growth prior to the global financial crisis, the last four Emerging market expansion returning to the agendayears have seen contraction and restructuring in the sector, with those Firms are increasingly looking to Asia for growth opportunities, withfirms previously dependent on financial services, particularly heavily a cluster of MA activity between US, UK and established Australianimpacted. The fall of Dewey LeBoeuf is perhaps the most notable firms as international firms seek to grow their presence in Asia. Africa isexample of the financial pressure faced by international firms but many also emerging as a nascent destination for law firms seeking to partnerothers have had to restructure, shed lawyers and pare back expansion with the growing number of corporate clients growing their businessesplans in light of the more challenging operating environment. in the region. Morocco has been one particular area of focus for law firms over the past year with activity including Bird Bird forming anMargin pressure and tougher operating conditions have had an explicit association with El Amari Associés, a legal services provider inand pronounced impact on the real estate strategies of law firms. A Casablanca. Istanbul has been another market of focus, while manymore proactive management of real estate as a tool to both reduce established firms in Moscow are seeing solid growth in businessoperating costs and improve productivity is being realised by many derived from domestic Russian clients.managing partners in law firms in the US, UK and beyond. Consolidation and lease events drive demand in mature marketsThis report assesses the real estate market conditions for law firms Lease events remain a key driver of real estate activity in maturein over 30 mature and emerging locations around the globe - the markets, in the absence of expansionary demand, acting as catalystsopportunities and challenges vary widely. For those firms operating for change and analysis of real estate options and strategy. Leasein multiple regions a clear understanding of this variance is becoming regears, renewals and renegotiations have been seen widely incritical to achieving sustainable growth. European markets, as firms have sought to take advantage of softer real estate market conditions and improve the terms of existing leases.Clouds remain on the economic horizonAfter a promising start to 2012, prospects have become gloomier In markets such as the UK consolidation is being widely seen amongacross the global economy. Once more it is problems in the developed mid-tier firms, with a number of firms linking up with regional andworld that are causing concern. Recent weeks have brought both national contemporaries to benefit from greater economies of scale.greater optimism and new fears in the Eurozone. The ECB’s new plan Such moves have been driving a consistent level of activity in realfor bond purchases and German support for additional ESM funds estate markets as firms take the opportunity to review existing realmean that the euro area at last has a credible strategy to ease market estate and optimise portfolios for the shape of the new business.speculation. At the same time, the deteriorating situation in Spain isan uncomfortable reminder that economic concerns will not disappear Larger, established firms have also shown an appetite to leverage theovernight. Such macroeconomic uncertainty has had a corrosive effect reduction in operating costs that active management of the real estateon corporate sentiment, and confidence remains fragile. portfolio can bring. Cost-saving and space-saving solutions are being widely explored with a some leading firms adopting the more open-The legacy of the financial crisis remains a yawning performance plan, efficient work spaces that many other companies have adopted ingap between advanced and emerging economies. Within a global other business sectors.expansion of 2.4% over the year, GDP growth in developed economiesis projected to be 1.3% during 2012 as deleveraging continues. Building obsolescence an issue to watchProspects for emerging markets are slower than last year, but the With pressure on firms to improve the efficiency and utilisation of theirdecline leaves growth at an enviable 5% year-on-year. This underlines office space, and a growing number of firms exploring more openthe fact that the emerging markets, particularly those in Asia, will plan workplaces with a less cellular structure, many law firms are
  7. 7. Jones Lang LaSalle Law Firm Perspective • Global • 2012 7finding that today’s demands are testing their existing buildings. Thesepressures are compounded by an increasing focus on sustainabilityand CSR objectives – areas in which real estate can make a significantand tangible impact. Over the coming years, and across a range ofglobal markets, building obsolescence will emerge a key issue forcingrelocation and impacting real estate strategy.Onshore, Nearshore, Offshore?Some law firms have also been assessing opportunities for locatingbusiness functions in lower cost nearshore or offshore locations as afurther way of reducing real estate costs in prime head office locations.After magic circle firms such as Clifford Chance and Allen Overyexplored shared service centres in India and Belfast, in 2007 and 2011respectively, other large firms have been considering such moves,although perhaps not at the pace initially anticipated by manyindustry observers.There is also a growing trend to outsource low grade legal work withmany corporates looking to hand over routine legal work to lower-costsuppliers. Some big corporations, including Rio Tinto, are outsourcingroutine legal tasks, fuelling rapid growth at outsourced providers likeAxiom, CPA Global and Pangea3, which was acquired by ThomsonReuters. The outsourcing of legal services is likely to continue apaceimpacting real estate requirements and strategy.Real estate strategy to influence competitive position andfirm performanceThe tough economic and operating conditions firms have faced sincethe global financial crisis of 2008 have forced many businesses tomanage operating costs more actively. Law firms have clearly not beenimmune to that pressure. The value of real estate and effective portfoliomanagement as a tool to manage costs and improve productivity,has seen it move up the agenda for many companies. This reporthighlights the challenges and opportunities facing law firms in the widerange of international markets many now operate. As we move into2013, a considered and forensic approach to real estate strategy anddecision making will become increasingly critical for law firms seekingto outperform their competitors and maximise their own performance.
  8. 8. 8 Law Firm Perspective • Global • 2012 Jones Lang LaSalleLaw firm market map Mosow Amsterdam Germany London City Vancouver Toronto Montreal Paris Brussels Warsaw Chicago Boston Milan San Francisco Philadelphia New York Beijing Madrid Dallas Washington DC Los Angeles Tokyo Atlanta Shanghai Houston Miami Dubai Hong Kong Abu Dhabi Singapore Sydney Melbourne
  9. 9. Jones Lang LaSalle Law Firm Perspective • Global • 2012 9Global office property clock Amsterdam Paris CBD Shanghai London, Melbourne Stuttgart Singapore Moscow, Warsaw, Berlin, Düsseldorf, Vancouver Rental Growth Rents Hong Kong Hamburg, Toronto Slowing Falling Beijing Cologne, San Francisco Munich, Montréal Houston Rental Growth Rents Accelerating Bottoming Out Sydney Abu Dhabi Dallas Dubai New York Washington DC Madrid Boston, Philadelphia Brussels Tokyo, Los Angeles Frankfurt, Istanbul, Milan Rome, Atlanta, Chicago, MiamiAmericasAsia PacificEMEAThe clock diagram illustrates where Jones Lang LaSalle estimates each position refers to prime face rental values. Markets with a “step pattern”prime office market is within its individual rental cycle as at end of the of rental growth do not tend to follow conventional cycles and are likelysecond quarter 2012. to move between the “hours” of 9 and 12 o’clock only, with 9 o’clock representing a jump in rental levels following a period of stability.Markets can move around the clock at different speeds and directions.The diagram is a convenient method of comparing the relative positionof markets in their rental cycle. Their position is not necessarilyrepresentative of investment or development market prospects. Their
  10. 10. 10 Law Firm Perspective • Global • 2012 Jones Lang LaSalleAmericasJones Land LaSalle’s law firm index selection. Finally, overall office leverage for tenants has little bearingThis index measures the environment for legal tenants within both a on the legal sector. High-scoring markets, for example, range fromgiven market and comparatively among markets throughout the United Washington, DC, which is moving further into tenant-favourableStates. Three component scores comprise the Jones Lang LaSalle territory, and New York, the tightest market nationally in termslaw firm index. These three main categories quantify the quality of of vacancy.talent within a metro area and footprint of firms in the area (presencein the market), pricing and concessions favourability across cities and Large presence Moderate presence Small presenceavailability of space and leverage across markets. The index, which Index score:takes into account 30 different metrics and data points among the three Flexible pricing Moderate pricing Limited pricingmajor buckets, ranks markets that score highly as the most favourable 46.6for firms to occupy, relocate to and/or expand. Large availability Moderate availability Limited availabilityMajor gateway markets tend to fall near the top of the list as a large Tier 1 markets: Tier 2 markets: Tier 3 markets:catchment base and status as international gateways are key factors • Law firm friendly • Somewhat law firm • Not law firm friendly • Strong presence of law friendly • Small legal footprintfor firms deciding where to maintain offices. Overall trends factor into firms in metro area • Concentration of law compared to overallthe index as well: most markets are seeing stagnant to declining levels • Growing or stable legal firms, but not a key office marketof legal employment, both in overall volume and as a percentage of services employment user of office space • Declining legal • Legal services • Stable or slightly services employmentoffice-using and total employment, as well as continued downsizing to comprises significant declining legal services in most casesmaximise efficiency. portion of office jobs employment • Legal services • Variety of block • Legal services comprises a small options and occupier- comprises an average fraction of office jobsAt the same time, cities with significant premiums for Class A and favourable leverage portion of office jobs • Limited blockTrophy space manage to outrank their peers, indicating that other • Block options exist, but availability and not readily available landlord-favourablefactors are more at play in the minds of legal tenants for market leverage
  11. 11. Jones Lang LaSalle Law Firm Perspective • Global • 2012 11Atlanta Index score: 52.9 Moderate presence Flexible pricing 8.4% Percent of Class A market 10.0% Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: Law firms in Atlanta are located in the Central BusinessDistrict along the Peachtree corridor in A-plus tower space, especiallyin Midtown. Some firms opt for Downtown for easy access to the city’s 18 Number of law firms occupying 22 Number of AmLaw 100 firms withcourthouses and government agencies, while to the north, Buckhead’s financial greater than 50,000 sq ft offices locallydistrict has also attracted some of Atlanta’s most visible firms. 2012 Law firm completed transactionsLaw firm activity has been relatively quiet in 2012 after a year in which some of thecity’s biggest firms committed to relocating or renewing existing space. ‘Givebacks’ Alston Bird 1201 West Peachtree Street of space seem to have stabilised, with many firms keeping the same footprint or 366,000 sq fteven adding small amounts of space. There are no ‘big game hunters’ in the market Relocationon par with what was seen in 2010 and 2011. Activity has been concentrated in theBuckhead and Midtown submarkets with a handful of renewals occurring Downtown. Paul Hastings Conditions generally remain in favour of occupiers, and particularly for this highly 1170 Peachtree Street sought-after tenant sector. 75,000 sq ft RelocationNonetheless, large firms seeking premium high-floor Trophy space in Buckhead willfind options limited. Demand is likely to funnel towards Midtown given the Class A Bondurant Mixson Elmorevacancies that remain elevated there. Overall, law firm growth appears to be neutral 1201 West Peachtree Streetin Atlanta. 35,000 sq ft Renewal with expansion Active Law Firm Requirements in the market (sq ft) Bryan Cave 90,000 Hunton Williams 70,000 Burr Forman 40,000 OUTLOOK Top challenges for law firms • Particularly in Buckhead, there is limited availability of large contiguous blocks PRICING AND incentives of premium space in the Trophy towers, which will cause pricing conditions to tighten sooner than other urban submarkets. Overall • Space options are further limited for law firms unwilling to relocate into buildings Average Class A asking rent $25.10 already occupied by competing legal groups. % annual change in Class A asking rent 2.2% Top opportunities for law firms Average % rent discount for negotiated rent 4.3% • Midtown, Atlanta’s traditional legal corridor, still has plenty of choices for top-tier Average % rent premium for Trophy space 12.0% blocks of space, and thus landlords remain generally aggressive on concessions here. Average % rent discount for sublease space 24.0% • One of the most highly sought-after tenant sectors, law firms can capitalise on Average annual escalation or bump 2.8% market conditions that overall, across the region, remain tenant-favourable as owners fight to lure tenants. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $54.00/$23.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 12/4 Landlord-favourable market
  12. 12. 12 Law Firm Perspective • Global • 2012 Jones Lang LaSalleBoston Index score: 51.3 Large presence Moderate pricing 20.0% 16.3% Percent of Class A market Percent of law firms comprising Moderate availability occupied by law firms active tenants in the marketLocational preference: The city’s premier law firms occupy space at the mostprestigious office towers in Boston’s Back Bay, Financial and Seaport Districts.Over the course of the past year, some law firms that have been traditionally 33 Number of law firms occupying 29Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallylocated in the suburbs or Cambridge have chosen to move to theSeaport District. 2012 Law firm completed transactionsIt was a rather quiet year for the legal services industry in the Boston area. With Mintz Levin limited large lease expirations and the volatility in the greater economy, rightsizing One Financial Center was still a trend for those firms transacting. While some law firms have cut 245,000 sq ft headcount over the past few years, many are realising their current spaces are Renewalnot as efficient as they could be. Gone are the days where large law libraries areneeded. Law firms are now looking towards technology to provide greater workplace Pepper Hamilton solutions and this is reducing space needs by close to 20.0 percent in many cases. 125 High Street With the high cost to fit-out space versus the amount landlords will contribute in 42,105 sq ft tenant improvement allowances, law firms are faced with the economic challenge of Renewal with expansionobsolete work space or increased capital expenditures to make a change. Collora Boston still remains a core real estate market and a market that many national law 100 High Street firms continue to add a presence to. Comprising approximately 20.0 percent of the 18,698 sq ft RelocationClass A market, along with just over 16.0 percent of active tenants in the market, lawfirms will still play a significant role in real estate activity this year and their decisionswill continue to shape the future of ever-changing occupier trends. Active Law Firm Requirements in the market (sq ft) Goodwin Procter 360,000 Goulston Storrs 140,000 Riemer Braunstein 60,000 OUTLOOK Top challenges for law firms • Firms in obsolete space face economic challenges due to a jump in rents for PRICING AND incentives quality, efficient footprints. • Premier large blocks of space are dwindling. Overall Average Class A asking rent $52.24 % annual change in Class A asking rent 6.7% Top opportunities for law firms Average % rent discount for negotiated rent 10.0% • Tenants still have a small window of opportunity to find real value in CBD low and Average % rent premium for Trophy space 22.0% mid-rise space options. • Larger, creditworthy firms can partake in potential build-to-suit opportunities in the Average % rent discount for sublease space 35.0% developing Seaport District. Average annual escalation or bump 2.0% New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $60.00/$35.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 5/2 Landlord-favourable market
  13. 13. Jones Lang LaSalle Law Firm Perspective • Global • 2012 13Chicago Index score: 58.4 Large presence Moderate pricing 16.5% 20.0% Percent of Class A market Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: The majority of Chicago’s law firm tenants are located inthe West Loop and Central Loop submarkets. However, two new office towersin River North have attracted law firms north of the river. 54 Number of law firms occupying 36Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallyFor many firms, economic realities have fundamentally changed the legal industryin what seems to be a permanent way. Lower and more competitive fee structures 2012 Law firm completed transactionshave affected margins, causing firms to re-examine all expenses including real Foley estate. In addition, firms with second-generation or older space are finding that 321 N Clark Street it is no longer conducive to how they practise law. The firms that have made the 173,000 sq ft commitment to build modern space are benefitting from the investment, but there Renewal with contractionare significant capital barriers that prevent others from doing the same. Latham Watkins The Chicago market remains largely tenant favourable; however indicators are 330 N Wabash Avenue showing early signs of the environment trending towards more neutral conditions. 137,000 sq ft The exception to this is large users, including many law firms, which have dealt with Relocationa dearth of large block options for some time and are already feeling the impact ofa leverage shift. Though several developers have plans to break ground in the near Perkins Coie future, delivery of a new building is still several years away. 131 S Dearborn Street 104,000 sq ft Continued economic uncertainty, as well as merger and acquisition activity, have Renewal with expansionleft some decision-makers cautious when considering future space plans and howto accommodate the seemingly inevitable fluctuations in office needs. No matter thesize of the firm, negotiating flexible lease terms will be paramount to law firms Active Law Firm Requirements in the market (sq ft)going forward. McDermott 250,000 DLA Piper 225,000 SNR Denton 125,000 OUTLOOK Top challenges for law firms • Large tenants are beginning to feel the effects of a tightening big block market, PRICING AND incentives resulting in a shift in leverage in favour of landlords. • The field of viable options for large users will continue to narrow in the coming Overall years as new development is four to five years away from delivery. Average Class A asking rent $35.87 % annual change in Class A asking rent 8.0% Top opportunities for law firms Average % rent discount for negotiated rent 5.0% • Small- and mid-sized law firms still have an abundance of options in the market, Average % rent premium for Trophy space 34.0% allowing them to more easily secure transactions that reduce operating costs. • An increasing number of law firms are considering aggressive space standards, Average % rent discount for sublease space 30.0% including universal office sizes for attorneys, which along with several other Average annual escalation or bump 2.5% efficiency initiatives, has helped firms give back approximately 17.0 percent of space when they relocate locally. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $65.00/$45.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 9/5 Landlord-favourable market
  14. 14. 14 Law Firm Perspective • Global • 2012 Jones Lang LaSalleDallas Index score: 53.0 Large presence Flexible pricing 14.0% 5.0% Percent of Class A market Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: Approximately 80.0 percent of law firms are located inthe Dallas CBD and Uptown submarkets, with some additional firms located inPreston Center, N Central Expressway and Far North Dallas. 23 Number of law firms occupying 19Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallyIn the next few years there will a great deal of churn in the law firm space as manyfirms have leases expiring in the 2013 to 2016 time frame. Typically firms are 2012 Law firm completed transactionslocated in second-generation Class A buildings in the Dallas CBD and will need tomake the decision to renew at the older, less desirable locations or move to newer, Baron Budd 3102 Oak Lawn Avenue more expensive locations (i.e. Uptown). This next wave of lease expirations in 2013 47,030 sq ft already has several of these firms actively pursuing spaces in the market. Renewal with expansionThere is a great deal of churn anticipated over the next few years with law firms Hallett Perrin in older spaces more likely to move (buildings like Lincoln Plaza, Trammell Crow 1445 Ross Avenue Center, 2100 Ross, and Fountain Place are expected to benefit), while law firms in 23,427 sq ft more modern space are more likely to renew. RelocationNew construction in Uptown is an attractive draw, but the economics of Class A Jackson Lewis space in the CBD will win out in many cases, where rents are 30.0 to 40.0 500 North Akard Street percent lower. 19,647 sq ft Relocation Active Law Firm Requirements in the market (sq ft) Locke Lord 180,000 Jones Day 140,000 Jackson Walker 120,000 OUTLOOK Top challenges for law firms • The overall market has shifted from strongly tenant-favourable to more neutral PRICING AND incentives conditions and net effective rents are rising, especially in Uptown. • Limited new construction over the next few years will force law firms with near- Overall term lease expirations to renew in place or consider second-generation space. Average Class A asking rent $21.25 • Financing constraints for new development will push construction levels below historic norms. % annual change in Class A asking rent 1.5% Top opportunities for law firms Average % rent discount for negotiated rent 12.0% • An abundance of full-floor or smaller blocks of space remain available for Average % rent premium for Trophy space 30.0% smaller firms. • One or two new construction projects may begin construction in the intermediate Average % rent discount for sublease space 40.0% term, which could deliver in the next 24 to 30 months. Average annual escalation or bump 2.5% • The increase in institutional ownership in the CBD makes existing properties more attractive to law firms. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $45.00/$20.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 12/0 Landlord-favourable market
  15. 15. Jones Lang LaSalle Law Firm Perspective • Global • 2012 15Houston Index score: 49.8 Large presence Moderate pricing 15.0% 2.0% Percent of Class A market Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: The majority of law firms are located in the CBD, Galleria andGreenway Plaza submarkets. Firms tend to prefer Trophy or Class A space in closeproximity to energy clients, as well as those buildings near the CBD courthouse with 28 Number of law firms occupying 44Number of AmLaw 100 firms withmarketable and well-known addresses. Due to the current scarcity of large blocks greater than 50,000 sq ft offices locallyof available space in the preferred submarkets, as well as the recent shift of newconstruction and clients to the West Houston submarkets, law firms will soon be 2012 Law firm completed transactionsforced to expand their search for space towards these suburban areas. Morgan Lewis 1000 Louisiana Street Houston’s status as a global energy leader has enabled a large influx of law firms to 89,518 sq ft locate in Houston and the CBD. Centrally located near the Houston City Hall and city Renewaland county court houses, the CBD attracts and retains boutique law firms specialisingin commercial and global energy practice litigation. The CBD remains Houston’s Crain Caton James predominant location for law firm tenants, with over 4.4 million square feet being 1401 McKinney Street occupied by notable tenants such as Vinson Elkins, Fulbright Jaworski and Baker 29,558 sq ft Botts, among many others. RenewalLaw firm tenants in the market have remained active despite the recent economic Strasburger Price slowdown. While we have recently seen several notable lease transactions, such as 909 Fannin Street Morgan Lewis’ renewal of nearly 90,000 square feet at the iconic Wells Fargo Plaza 28,226 sq ft (1000 Louisiana), the current trend among Houston law firms is to downsize and give Expansionback space. For example, Locke Lord recently gave back four floors of space totaling110,000 square feet at Chase Tower (600 Travis). Furthermore, it has been noted thatLocke Lord temporarily ceased the subsidisation of its associates’ parking; all a move to Active Law Firm Requirements in the market (sq ft)cut costs in light of the national economic downturn. Susman Godfrey 75,000Law firm tenants continue to proceed in a cautiously optimistic manner, and cost control Coats Rose 60,000seems to be the key objective of many firms in the area. However, we expect activity toincrease in the coming years as many law firm leases are set to expire over the next 24 BakerHostetler 50,000to 36 months. This will result in an increased competition for quality, second-generationspace. While construction costs for commercial law firm build-outs are increasing, they OUTLOOKhave held fairly steady over the past 12 months. For renovations of second-generationoffice space, hard construction costs for upgraded law firm projects range from $40 per Top challenges for law firmssquare foot on the low end to $80 per square foot on the higher end. • Large blocks of space available in choice submarkets (CBD, Greenway Plaza) will continue to decline as no new developments are in the pipeline. PRICING AND incentives • Landlords will continue to raise asking rents and scale back concession Overall packages in prime Class A buildings as Houston’s economy continues to grow. • In order to secure the most favourable rates on available space, law firms must Average Class A asking rent $37.89 be willing to enter the market sooner despite future-term lease expirations. % annual change in Class A asking rent 4.0% Top opportunities for law firms Average % rent discount for negotiated rent 5.0% • Over the next 18 to 36 months, new Class A buildings are coming online in the Average % rent premium for Trophy space 11.0% Galleria/West Loop and West Houston submarkets, offering firms the chance to Average % rent discount for sublease space 20.0% move into higher-quality spaces with premier amenities. • Energy-focused law firms will continue to see growth as a result of the booming Average annual escalation or bump 1.8% energy market in Houston and in South Texas (Eagle Ford Shale Play). New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $40.00/$35.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 6/2 Landlord-favourable market
  16. 16. 16 Law Firm Perspective • Global • 2012 Jones Lang LaSalleLos Angeles Index score: 61.9 Large presence Flexible pricing 19.4% 23.0% Percent of Class A market Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: A majority of CBD law firms are located on Bunker Hilland the Financial District. A large number of Westside legal tenants tend tobe concentrated in Century City and in the Water Garden in Santa Monica. 80 Number of law firms occupying 51 Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallyDowntown’s financial core could attract well-entrenched Bunker Hill law firms asthe area continues to benefit from retail-led revitalisation. The Westside marketcould see a shift away from pricier submarkets such as Beverly Hills and Santa 2012 Law firm completed transactionsMonica, to Century City, which currently has a higher vacancy. Lewis Brisbois Bisgaard Smith 221 N Figueroa Street Los Angeles-based law firm tenants are once again thinking in terms of recruitment 160,415 sq ft and seeking locations that appeal to their employee base. Law firm Morrison RenewalForester has relocated from Bunker Hill to the amenity-rich Financial District andwe anticipate other large downtown relocations in the next couple of quarters. We Alston Bird also expect to see more long-term leases signed as companies gain increasing 333 S Hope Street confidence in the regional economic outlook. 80,000 sq ft RenewalOn the Westside, law firms choosing to locate in Santa Monica, which has thelowest vacancy in the region, will face strong competition for Class A space. Morrison Foerster Entertainment, technology and media companies have driven recent growth. On the 707 Wilshire Boulevard other hand, Century City will continue to offer prime location opportunities for those 77,300 sq ft Relocationlaw firms wishing to trade up.The Downtown market could see a dramatic change in ownership with one of itslargest owners placing its entire 7.3 million-square-foot portfolio, comprised of 37.0 Active Law Firm Requirements in the market (sq ft)percent of the downtown Class A market, on the market for sale. Should an existing Sedgwick 80,000large downtown landlord acquire the entire portfolio, the new ownership wouldstand to gain substantial leverage, and we could see even greater pricing discipline Pepper Hamilton 25,000exerted in the market. Consequently, the window of opportunity to lock in favourable Polsinelli Shughart 25,000rates could be more limited. OUTLOOK Top challenges for law firms • Potential disposition and sales of the MPG Portfolio to a local competitor could PRICING AND incentives instill more market discipline and cause rents to increase. • Low vacancy in Santa Monica could compel landlords to increase rents further. Overall • Cash-strapped owners remain unable to offer high tenant improvement Average Class A asking rent $41.64 allowances. % annual change in Class A asking rent 1.3% Top opportunities for law firms Average % rent discount for negotiated rent 10.0% • A large number of contiguous blocks of space available in Downtown and Average % rent premium for Trophy space 17.3% Century City will provide firms with ongoing leverage. • Los Angeles continues to offer law firms great value in terms of rent, relative to Average % rent discount for sublease space 20.0% other gateway markets. Average annual escalation or bump 3.5% • Now is a great opportunity to trade-up to Trophy assets or amenity-rich locations. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $60.00/$30.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 10/4 Landlord-favourable market
  17. 17. Jones Lang LaSalle Law Firm Perspective • Global • 2012 17Miami Index score: 47.8 Large presence Moderate pricing 17.0% 41.7% Percent of Class A market Percent of law firms comprising Moderate availability occupied by law firms active tenants in the marketLocational preference: Miami’s CBD is comprised of two submarkets, Brickelland Downtown. 71.0 percent of Class A law firm users occupy space withinthe Downtown sector of the urban core. Up to 600,000 square feet of demand 6Number of law firms occupying 20Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallyis expected from this industry sector. Of this, nearly 344,000 square feet areactively touring market wide – 85.0 percent of which are CBD requirements.Look to another 249,000 square feet not yet touring, but up for renewal – all of 2012 Law firm completed transactionswhich will remain in the CBD. Hogan Lovells 600 Brickell Avenue Despite the dissolutions and defections among law partners and the bleak job 40,000 sq ft market for new law school graduates, Miami’s legal tenants have still managed to Relocationrenew, expand and open new offices. Market-wide, Trophy product has capturedover 80.0 percent of all law firm transactions, with the bulk of occupancy on a Diaz Reus square footage basis occurring in Downtown. On the ‘mega’ tour activity front 100 S.E. Second Street (requirements at or above the 40,000-square-foot benchmark) over one-quarter or 14,500 sq ft 545,000 square feet of all Miami’s tours fell within this range. While several industry Renewal and expansionsectors made up these tours, the largest in order of size were law firms. Stroock One of the first noted transactions to be publicly announced going into third quarter 200 S. Biscayne Boulevard tracks along the same trend – demand for prime spaces within the CBD and some 14,500 sq ft Renewalof its largest occupiers emanating from the legal industry. During the first quarter,Hogan Lovells (AmLaw’s sixth-ranked firm) signed a short-term lease for 21,000square feet in Downtown at Florida’s largest Trophy asset (Southeast Financial Active Law Firm Requirements in the market (sq ft)Center). By third quarter, recent press coverage indicated a long-term commitmentin the CBD’s newest Trophy tower, Brickell World Plaza. The building, located in the Holland Knight 100,000Brickell sector, will see Hogan occupy 40,000 square feet. Gunster 25,000 The Ferraro Law Firm 20,000 OUTLOOK Top challenges for law firms • ‘View space’ for law firms remains limited even in some of the new developments PRICING AND incentives that delivered vacant during the last cycle. • Space properly sized to accommodate new criteria. Overall • Efficient use of space due to new technology (no more big libraries, mailrooms). Average Class A asking rent $40.77 % annual change in Class A asking rent -2.3% Top opportunities for law firms Average % rent discount for negotiated rent 4.0% • The lease environment remains overall favourable, if not excellent, for Average % rent premium for Trophy space 10.0% premium space. • Net rents continue to be driven down due to oversupply via new development in Average % rent discount for sublease space 11.5% the last cycle. Average annual escalation or bump 3.0% • New buildings and upgrades from existing product offer high-end finishes, increased amenities and efficiencies. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $40.00/$35.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 7/7 Landlord-favourable market
  18. 18. 18 Law Firm Perspective • Global • 2012 Jones Lang LaSalleNew York Index score: 61.5 Large presence Flexible pricing 11.7% 16.9% Percent of Class A market Percent of law firms comprising Large availability occupied by law firms active tenants in the marketLocational preference: The majority of law firms in New York are located inthe Midtown and Downtown submarkets. Specifically, firms gravitate to newerClass A and Trophy buildings within the Financial District, Columbus Circle, 118 Number of law firms occupying 83 Number of AmLaw 100 firms withGrand Central, Plaza District and Times Square. There is a migration of firms greater than 50,000 sq ft offices locallymoving to the west side of Midtown and Downtown. With large blocks of ClassA and Trophy space becoming available Downtown at a significant discount to 2012 Law firm completed transactionsMidtown rents, Downtown provides an attractive alternative for firms to relocate.Many top firms, however, chose to remain in the Plaza District. Chadbourne Parke 1301 Avenue of the Americas 200,000 sq ft Despite a handful of high-profile transactions this year, total occupancy in the legal Relocationservices industry has been receding in Manhattan as many firms contract, both inhead count and square feet per employee. Year-to-date, law firm leasing activity Wilson Sonsini Goodrich Rosati represents just 5.3 percent of total, compared to 17.0 percent in 2007. 1301 Avenue of the Americas 48,980 sq ft Top New York law firms are facing flat to declining profits, as a result of a contraction Renewalin overall business volume (in specific, dramatically reduced transaction activity onWall Street), increased competition, outsourcing of low margin work and insourcing, Akerman with companies increasingly relying on in-house legal staff. Dewey LeBoeuf—in 666 Fifth Avenue business for more than a century-filed for bankruptcy in early 2012 and vacated 48,166 sq ft 475,000 square feet at 1301 Avenue of the Americas. Chadbourne Parke recently Relocationsigned a direct lease to take 200,000 square feet of Dewey’s space. Chadbournewill fully rebuild Dewey’s space to adopt new law firm standards and efficiencies. Active Law Firm Requirements in the market (sq ft)Many legal firms are opting to renew, often several years in advance, to lock-in White Case 400,000current terms and avoid the upfront costs of relocation and existing asset write-offs. Kaye Scholer, however, signed a letter of intent to take 260,000 square feet in Kaye Scholer 250,000Boston Properties’ new development at 250 West 55th Street in what may prove to Mayer Brown 250,000be the largest transaction of 2012. A bright spot in the industry has been the modestrebound in MA activity and growth in the new media and technology industries,which provides opportunities for firms that specialise in those fields. OUTLOOK Top challenges for law firms • Legal services has been one of the slowest industries to recover from the downturn, PRICING AND incentives with employment still down 8.5 percent in Manhattan since the 2008 peak. • Rising Trophy rents, coupled with lower profits, are forcing firms, which have Overall traditionally occupied the top end of the market, to consider more cost- Average Class A asking rent $65.62 effective options. % annual change in Class A asking rent 7.4% Top opportunities for law firms • By becoming more efficient, law firms that have relocated have been able to Average % rent discount for negotiated rent 15.0% shed approximately 15 percent of their footprint. Average % rent premium for Trophy space 20.7% • Even with decreased vacancy rates, viable options are available, particularly in Average % rent discount for sublease space 19.3% Midtown West and Downtown, which have a significant amount of new construction. Average annual escalation or bump 1.7% • With the growth of the new media and technology industry, there is opportunity New/Renewal (assuming 10-year term) for firms that specialise in those sectors. Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $51.69/$31.47 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 7/6 Landlord-favourable market
  19. 19. Jones Lang LaSalle Law Firm Perspective • Global • 2012 19Philadelphia Index score: 50.5 Large presence Moderate pricing 20.3% 26.1% Percent of Class A market Percent of law firms comprising Moderate availability occupied by law firms active tenants in the marketLocational preference: The majority of Philadelphia’s law firms are located inthe CBD’s Market Street West submarket. This location provides easy accessto abundant amenities and immediate proximity to the city’s concentration 23 Number of law firms occupying 18Number of AmLaw 100 firms with greater than 50,000 sq ft offices locallyof professional services companies. Despite the declined availability oflarge contiguous blocks and rental rate increases in Market Street West, thesubmarket will remain the core location for law firms. 2012 Law firm completed transactions Morgan Lewis Law firm activity spiked in 2012 as Market Street West’s largest law firms completed 1701 Market Street transactions. In light of tightened Trophy conditions, large tenants have come 289,432 sq ft to market two to three years ahead of expiration, finalising leasing decisions as Renewalfar out as 2015. As year-end 2011 approached, Reed Smith’s market-moving115,000-square-foot lease at Three Logan Square created a window of opportunity Cozen O’Connor for Cozen O’Connor to upgrade its space. The Philadelphia-based firm recently 1650 Market Street signed a long-term lease to occupy Reed’s One Liberty vacated space upon its 200,000 sq ft relocation. Morgan Lewis and Ballard Spahr also finalised leasing decisions Relocationthis year. Ballard Spahr While Morgan Lewis renewed in place, many of Philadelphia’s CBD law firms are 1735 Market Street rightsizing existing footprints; by 13.0 percent on average. Ballard Spahr will shed 179,000 sq ft Renewal with contractiontwo floors of space at 1735 Market Street, and Reed Smith is decreasing its footprintby more than 25.0 percent.Accelerated law firm transaction volumes drove a year-on-year decline in sector Active Law Firm Requirements in the market (sq ft)requirements by nearly 50.0 percent. Now, with 440,000 square feet of active firms Pepper Hamilton 220,000in the market, the majority is comprised of small firms, less than 10,000 squarefeet requirements. Finalised relocation decisions have decreased high-quality, Drinker Biddle 175,000contiguous blocks of available space, pushing large requirements-focused on Harkins Cunningham 9,000Trophy-to consider new proposed developments. Simultaneously, consolidations arecreating availabilities at Trophy assets, bringing opportunity to small- and mid-sizedfirms. OUTLOOK Top challenges for law firms • Strong Trophy landlord leverage is driving increased rental rates. PRICING AND incentives • With no new office development, large law firms will be faced with limited contiguous blocks at high-quality assets. Overall • Landlords closely monitoring small- to mid-sized law firm credit. Average Class A asking rent $27.92 % annual change in Class A asking rent 2.1% Top opportunities for law firms Average % rent discount for negotiated rent 10.0% • Market Street West’s occupancy-constrained, Class A properties are willing to do Average % rent premium for Trophy space 21.3% aggressive deals. • Trophy tenant consolidations have yielded new availabilities for small- to mid- Average % rent discount for sublease space 10.3% sized users. Average annual escalation or bump 2.5% • Class A availabilities are very conducive for half- to full-floor law firms. New/Renewal (assuming 10-year term) Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $45.00/$22.50 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 8/4 Landlord-favourable market
  20. 20. 20 Law Firm Perspective • Global • 2012 Jones Lang LaSalleSan Francisco Index score: 38.2 Large presence Limited pricing 5.2% Percent of Class A market 8.6% Percent of law firms comprising Moderate availability occupied by law firms active tenants in the marketLocational preference:The majority of law firms in San Francisco are located inthe North and South Financial Districts where premier Class A properties areconcentrated and where law firms can be in close proximity to other businesses 16 Number of law firms occupying 41 Number of AmLaw 100 firms withand clients. The centre of San Francisco’s business district has shifted in recent greater than 50,000 sq ft offices locallyyears towards the South Financial District as companies look to take advantageof newer office buildings and closer proximity to multiple forms of public 2012 Law firm completed transactionstransportation. Additionally, redevelopment of the Transbay Terminal and thefuture extension of the Caltrain rail line are drawing more companies to Lewis Brisbois Bisgaard Smith this submarket. 333 Bush Street 52,000 sq ft Relocation with contractionOver the past four years, the legal industry in San Francisco has experienceda significant decline in occupied space as law firms have been among some of Jackson Lewis the most adversely affected companies during the recession. As a result, many 50 California Street have shed hundreds of thousands of square feet in an effort to reduce costs and 18,878 sq ft streamline business. Although many large deals have been signed in recent years, Relocationmost involved downsizing or renewing in place - entering the market simply becauseof impending lease expirations. Mintz Levin 44 Montgomery Street Today, however, there are a handful of firms in the market for expansion space, but 15,666 sq ft rightsizing and creating a more efficient workplace continue to dominate leasing New deal to the marketactivity in this industry. Active Law Firm Requirements in the market (sq ft) Coblentz Patch Duffy West 85,000 Gordon Rees 80,000 Fenwick West 60,000 OUTLOOK Top challenges for law firms • Large block availability is dwindling significantly with new supply still 6 to 18 months PRICING AND incentives away from delivery. • Law firms in the market for large blocks are facing stiff competition from technology Overall companies, which is the fastest growing industry in the market. Average Class A asking rent $51.74 • Rents have increased significantly and continue to rise, placing pressure on tenants to either act now or make shorter-term deals to holdover. % annual change in Class A asking rent 17.5% Top opportunities for law firms Average % rent discount for negotiated rent 5.0% • Many landlords have begun to build out ‘open’ workspace to appeal to tech tenants; Average % rent premium for Trophy space 24.3% these spaces could work for law firms seeking efficiencies. • New developments in the South Financial District will open up opportunities for tenants Average % rent discount for sublease space 32.0% to relocate from the North Financial District into newer, more efficient space. Average annual escalation or bump 3.0% • Popularity of the South Financial District and South of Market among tech firms has left New/Renewal (assuming 10-year term) more large blocks in the North Financial District, where many law firms occupy space. Tenant-favourable market Class A tenant improvement allowance ($ price per sq ft) $50.00/$25.00 2012 2013 2014 2015 2016 Neutral market Class A free rent (months) 4/2 Landlord-favourable market

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