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  • Writer's pictureRealFacts Editorial Team

More Law Firms Opt to Relocate Instead of Renewing


People shaking hands in a law office

As the dynamics of the U.S. office market continue to evolve, a growing number of law firms are opting to relocate their offices instead of renewing existing leases. This trend, highlighted in Colliers' 2024 spotlight report on North American law firm practice groups, underscores a significant shift in the commercial real estate landscape driven by changing priorities and emerging demands.


Modern Workspaces and Flexible Designs


"Law firms seek buildings that provide modern, efficient workspaces," Colliers reports. The emphasis is on universal office designs that foster both privacy and collaboration. Newer buildings with flexible floor plates and advanced infrastructure are particularly attractive, as they support the latest technological needs and enable firms to implement these contemporary designs more effectively. Relocation offers law firms an opportunity to rebrand their physical presence, aligning it with modern standards and portraying a forward-thinking, adaptive culture.


This strategic shift is underpinned by a belief that a high-quality work environment can attract top talent, boost staff productivity and well-being, and enhance a firm's prestige. Even as the return-to-office pace appears to moderate, with many tenants requiring employees to work in the office at least three days a week, the labor market remains tight, favoring workers and driving significant cultural shifts in office design, space utilization, and employee expectations.


Demand for Flexible Lease Agreements


In addition to seeking modern amenities, law firms are demanding more flexible lease agreements, including new termination options. This need for flexibility is growing as firms navigate a market that has seen over 245 million square feet of negative absorption since the pandemic, more than double the negative 93 million square feet recorded during the Global Financial Crisis. Colliers predicts this trend will continue "firmly in the red" for 2024.


The U.S. office vacancy rate climbed to 17.5% at the start of 2024, 40 basis points higher than in Q4 2023. The trend of structural vacancy is expected to intensify as evolving demands and higher ESG standards render many older buildings functionally obsolete. Despite these challenges, spaces with state-of-the-art amenities continue to command a premium, especially as new developments slow down due to higher construction and financing costs and interest rate uncertainty.


Navigating Rising Rents and Tenant Improvement Allowances


Despite the challenging market conditions, gross asking rents have generally continued to rise. Colliers' report indicates that the average asking rent across 20 markets is $44.83 per square foot, a 5.1% increase from the previous report. The flight to quality at the expense of Class B and C buildings has driven higher rents for Class A properties.


However, even as landlords raise asking rents, they are also increasing tenant improvement (TI) allowances to attract and retain tenants. On a national basis, the average TI allowance is $122 per square foot, with 10.5 months of free rent. These allowances vary by region, with the highest figures reported in the West at $155 per square foot and 9.1 months of free rent. The Northeast follows with $140 per square foot and 13.2 months of free rent.


Among major cities, Manhattan leads with the highest rent for Class A law firm space at $80.43 per square foot, coupled with a TI allowance of $150 and 14 months of rent abatement. San Francisco is second, with an asking rent of $77.27 per square foot, a TI of $200, and 12 months of free rent. Other notable markets include Austin at $60.53 per square foot, Washington, DC at $59.07 per square foot, and Dallas-Fort Worth, which remains competitive due to its dynamic market conditions.


The Future Outlook


The increase in TI allowances requires law firms to explore various financing options, potentially impacting their financial health and operational flexibility. Lease negotiations are further complicated by landlords' scrutiny of firms' financial stability, compelling firms to secure leases with protection against market volatility and unforeseen financial challenges.

Despite these complexities, the trend of relocating rather than renewing leases reflects a broader strategic shift among law firms. By moving to modern, efficient spaces with flexible lease terms, law firms can better align their physical presence with contemporary standards, attract and retain top talent, and navigate the evolving commercial real estate landscape more effectively. This trend is likely to continue as firms adapt to the new realities of the post-pandemic office market.

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